creative destruction or destructive perpetuation: the role of large state-owned enterprises and smes...

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Creative Destruction or DestructivePerpetuation: The Role of Large State-owned Enterprises and SMEs in RomaniaDuring TransitionRudiger Ahrend & Joaquim Oliveira MartinsPublished online: 19 Aug 2010.

To cite this article: Rudiger Ahrend & Joaquim Oliveira Martins (2003) Creative Destruction orDestructive Perpetuation: The Role of Large State-owned Enterprises and SMEs in Romania DuringTransition, Post-Communist Economies, 15:3, 331-356, DOI: 10.1080/1463137032000139043

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Post-Communist Economies, Vol. 15, No. 3, September, 2003

Creative Destruction or Destructive Perpetuation: TheRole of Large State-owned Enterprises and SMEs inRomania During Transition

RUDIGER AHREND & JOAQUIM OLIVEIRA MARTINS

Abstract

In this article we investigate the role both the old large enterprises sector and thenew SME sector have played during transition in Romania. In the first part, basedon micro data for the large SOE sector, we document how heavily loss-makingenterprises have been able to survive for a decade, through initially direct and laterincreasingly indirect subsidies from the state. We show concretely how the ‘survivalof the unfittest’ has led to the emergence of pervasive chains of arrears in theeconomy, with large negative consequences not only for the budget and state-ownedenergy suppliers but also for general economic efficiency. We thus show that thelagging privatisation of large SOEs has had negative systemic effects on theRomanian economy, well beyond the question of increased enterprise efficiency. Inthe second part we show that—in spite of the drain of resources from the large SOEsand a difficult business climate—a sector of SMEs has emerged that has been themain contributor to employment and export growth in recent years. However, thedevelopment of the SME sector has been severely constrained by the aforementionednegative forces, as documented by its underdevelopment in comparison with those ofother Eastern European transition countries.

Restructuring the enterprise sector has proved to be one of the major challenges intransition. Under market conditions, that is mainly subject to world market prices,large state-owned enterprises (SOEs) often turned out to be inefficient and value-de-stroying. From this followed the need to restructure them into viable units, and if thisproved impossible, to shut them down. Privatisation was generally thought to be thebest way to achieve this, partly because private owners were supposed to be moreefficient managers and partly because the necessary restructuring was thought to beinfeasible in state-owned entities owing to political and social pressures. As theprocess of restructuring would imply job losses and—at least initially—an output

Rudiger Ahrend and Joaquim Oliveira Martins, Economics Department, OECD, 2 rue AndrePascal, 75775 Paris Cedex 16, France.The views expressed in this article are those of the authors and do not necessarily reflect thoseof the OECD or the governments of its member countries. We would like to thank Val Koromzay,Silvana Malle and Bill Tompson for many helpful comments and suggestions, and AnneLegendre for statistical assistance. Part of this work was carried out in the context of the OECDEconomic Assessment of Romania.

ISSN 1463-1377 print/ISSN 1465-3958 online/03/030331-26 2003 Centre for Research into Post-Communist EconomiesDOI: 10.1080/1463137032000139043

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332 Rudiger Ahrend & Joaquim Oliveira Martins

decline in the former state sector, the entry of new private firms was supposed tocompensate to some degree for the fall in employment and output.

This article looks in detail at how and to what degree this process of exit ofnon-viable SOEs and entry of new SMEs has come about in Romania. In the firstpart we show that Romania has been among the Eastern European transitioncountries where privatisation of large SOEs has been slowest (and still is far fromcomplete). We then show how this lack of determined large-scale privatisation hadnegative systemic effects on the economy as a whole that go well beyond thequestion of whether privatised enterprises improved efficiency more than those thatremained in state ownership.1 In the second part of the article we describe how, inspite of the crowding out of resources by the SOEs, a new SME sector has emergedthat has been the main contributor to employment and export growth during recentyears. This sector, however, is small compared with those of most other EasternEuropean transition countries. We argue that one of the main causes of the relativelyslow development of the SME sector in Romania, in addition to a difficult businessclimate, has been the burden put on the Romanian economy by the inefficient largeSOE sector.

While large-scale privatisation has been particularly sluggish in Romania, it is farfrom the only country that tried to keep large inefficient SOEs afloat through directand indirect subsidies. Typically, at the beginning of transition, most countriessubsidised enterprises directly, either via the budget or the central bank—often withthe foreseeable disastrous macroeconomic consequences of excessive budget deficitsand spiralling inflation (see e.g. OECD, 1998; OECD, 1999). In those countrieswhere large loss-making SOEs were not privatised or liquidated, direct statefinancing was often replaced by indirect measures once the aforementioned channelsof subsidies were abandoned.2 Typical examples were soft loans from state-ownedbanks or the acceptance of arrears to the budget (see e.g. OECD, 1997). When theseloopholes were also closed, indirect financing sometimes shifted to subsidisation viaenergy suppliers and/or unsustainably low energy prices, even in energy-poorcountries. The latter phenomenon, of subsidising the economy through the state-owned energy sector, is documented in Pinto et al. (2000) and OECD (2002a) forRussia and in Petri et al. (2002) for Ukraine and Azerbaijan.

In contrast to these studies, which are based on macroeconomic data (e.g. onarrears) and information from the energy suppliers, this article uses in additionmicro-data from the balance sheets of large SOEs in Romania. Therefore, in additionto studying the question of whether there has been subsidisation of the Romanianeconomy via the state-owned energy sector, we can also investigate to what degreesubsidies from the energy sector are specifically targeted to loss-making SOEs,and—more importantly—to what degree such macroeconomic problems as non-pay-ments are really caused by the large loss-making SOE sector, and are not simplyintrinsic to the economy.

Based on this unique data set, we show that not only has there been extensive(though decreasing) subsidisation of the enterprise sector from state and quasi-statesources during recent years in Romania, but also that these subsidies have principallyprofited the large SOE sector. We furthermore show that it is a relatively smallnumber of large loss-making SOEs that, by not paying suppliers and the budget, havecaused a spiral of arrears and non-payments. This chain of arrears and non-paymentshas weighed heavily on general economic efficiency, as well as the overall businessclimate.

We furthermore find that while state ownership of large inefficient enterprises is

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Enterprises in Romania During Transition 333

bad, being in the privatisation pipeline without ever being actually privatised isworse. Unsurprisingly, it is these enterprises—lacking efficient supervision andincentives for management to perform—that have been accumulating the largestlosses and arrears.

We then turn to the question of entry in Romania. We document how, despite thecrowding-out of resources by the unrestructured SOE sector, there has emerged arather dynamic layer of small and medium-size enterprises (SMEs), making animportant contribution to employment creation. The sectors where SMEs are domi-nant have also become the main drivers of exports. In the early years of transitionRomania intensified its specialisation in heavy industries (e.g. iron and steel)‘benefiting’ from the previous large industrial base and an overvalued exchange ratethat favoured cheap imports of energy and raw materials. Once this obviouslyunsustainable strategy had failed, Romania’s real comparative advantage emergedrapidly through increasing specialisation in labour-intensive light industries. By 2001the main revealed comparative advantages were in the apparel and clothing indus-tries, footwear and furniture.

In spite of these obviously positive changes, we also show that the developmentof the Romanian SME sector has, however, been severely constrained by the burdenemanating from the inefficient large SOE sector, comparing the size and develop-ment of the SME sector in Romania with those in other Eastern European transitioncountries.

The first section gives an overview of the situation in the Romanian enterprisesector and the (painfully slow) privatisation process of large SOEs. The second andthird sections expose the negative impact of the lack of determined privatisation andrestructuring of large SOEs on the wider economy. The fourth section documents thenegative consequences of slow SOE restructuring on the energy sector in particular.The fifth section investigates more precisely the social and political pressures thathave obstructed privatisation of large SOEs, and the final section describes how theSME sector has developed under difficult circumstances, and compares it with theSME sectors in other Eastern European transition countries.

The Restructuring of the Large Enterprise Sector has Lagged

Slow restructuring has been a general feature of the large state-owned enterprisesector in Romania. Before 1997 privatisation in industry was mainly oriented tosmall and medium-size enterprises, which is reflected in the fact that, in spite of amassive wave of privatisation during 1995–96, 58% of industrial production stilltook place in the public sector in 1997. This lack of decisive action on privatisationand restructuring of large companies actually worsened the problems of transition inRomania. Inefficient state-owned enterprises, kept afloat through large direct andindirect subsidies, weighed heavily on state finances. The lack of fiscal stabilityprevented macro-stabilisation, which, together with the misallocation of resources,significantly impeded sustainable economic growth.

As a substitute for swift privatisation, the restructuring of large enterprises waspursued through ‘isolation’ programmes that were designed to improve operationalperformance and facilitate the process of privatisation or liquidation.3 Unfortunately,most isolation programmes failed to deliver. Often the operational performance of‘isolated’ enterprises worsened, their indebtedness increased, and restructuringefforts in these enterprises were weaker than in non-isolated state-owned enterprises.

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As a result, according to Djankov (1999), the transfers from the budget to ‘isolated’firms increased from 5.4 to 12% of total revenues during 1992–96.

In 1997 a new reform-oriented government launched the first serious attempt totackle the issue of privatising and restructuring the remaining large SOEs. In 1998and 1999 the number of large enterprises that were privatised increasedsubstantially (Table 1). Important results were the sale of a 35% stake in RomTele-com (the Romanian national telephone carrier) to the Greek operator OTE in 1998,and the sale of DACIA (the major Romanian car manufacturer) to Renault in 1999.Moreover, two large Romanian Banks (Romanian Bank for Development and BancPost) were sold to foreign investors. However, the reformist government did notmanage to build the necessary support for a programme that was inevitably contro-versial, because it entailed transitional social costs, and generated resistance bothfrom the political opposition and from within the coalition. Following widespreadpopular discontent, the government was replaced in December 1999. In 2000, anelection year, the main actions in enterprise privatisation were attempts to sellPETROM SA (the national oil company) and TAROM (the national airline), bothfailing to raise investors’ interest. Nevertheless, some progress on restructuring wasachieved that year with the unbundling of Conel (the national electricity company)and Romgaz (the national gas company) along functional lines. Conel was split intotwo electricity production companies (SC Termoelectrica and SC Hydroelectrica), acompany responsible for transporting electricity (CN TransElectrica) and an elec-tricity distribution company (SC Electrica, which itself regroups eight local distri-bution operators). The gas sector was structured similarly, with RomGaz keepingonly exploration and storage activities, transport being transferred to the newcompany SN Transgaz and distribution going to two new regional distributioncompanies, SC Distrigaz Nord and SC Distrigaz Sud.

Following elections and the formation of a new government, in January 2001 theState Ownership Fund (SOF), which had been perceived as inefficient, was replacedby a new administration, the Authority for the Privatisation and Management of StateAssets (APAPS). A number of enterprises that had been under the authority of theSOF, however, were transferred not to APAPS but to the relevant line ministries.While this move may have helped to improve supervision of these companies, it risksdiminishing interest in future privatisation.

Further, albeit limited, progress on large enterprise restructuring has beenachieved since 2001. The most significant achievements have been the sale of BancaAgricola to Raiffeisen Austria, and of Sidex Galati to the primarily India-basedmultinational LMN holdings, one of the world’s largest steel producers. Theimportance of the latter can hardly be exaggerated, given that Sidex accounts forroughly three-quarters of Romanian steel production, or around 15% of Romaniangross industrial output.

The continual delays in the privatisation process have led to a situation where, inspite of limited improvements since 1997, state ownership in the industrial sector isstill pervasive. In 2001 it was still 42% (Figure 1), though by May 2002, with thesale of Sidex Galati, it had probably come down to around 35%.

Overall, state activity in the Romanian economy is still significantly above thelevel in its economically more successful neighbours (Figure 2). Moreover, thedevelopment of the private sector in recent years depends only to a limited extent onthe divestment of the state, being rather the result of a shift of economic activity tothe service sector, which is characterised by a relatively high degree of privateownership.

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Tab

le1.

Evo

lutio

nof

the

priv

atis

atio

npr

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s

1993

1994

1995

1996

1997

1998

1999

2000

2001

Num

ber

ofco

mpa

nies

inSO

F/A

PAPS

port

folio

,59

3762

9176

0290

1055

5443

3031

4914

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ginn

ing

ofye

ara

Num

ber

ofco

mpa

nies

priv

atis

eddu

ring

the

year

265

604

648

1388

1304

1267

1854

1341

127

By

size

b

Lar

ge2

1230

2535

8224

19M

ediu

m24

110

268

238

150

589

247

19Sm

all

238

472

322

984

978

1183

1070

89B

ypr

ivat

isat

ion

met

hodc

ME

BO

261

519

4314

Dir

ect

nego

tiatio

ns4

8560

510

0610

6424

413

3712

3519

Auc

tions

455

231

991

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les

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pita

lm

arke

t9

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106

16So

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are

byye

arin

cons

tant

pric

es(1

995

144.

347

1.4

1840

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0.4

603.

374

1.3

824.

352

5.9

617.

8pr

ices

,bn

lei)

Com

pani

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fore

ign

inve

stor

s1

15

444

9683

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ocee

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ign

inve

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s($

mn)

23.

915

15.5

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860

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7

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es:a T

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folio

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0).

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Figure 1. Share of the private sector in economic activity in 2001 by sectors (%).

The Lack of Restructuring Leads to Continuing Large-scale Subsidisation

While the burden has become less visible, the lack of restructuring of the largeenterprise sector is still crowding out resources from the rest of the economy. Directsubsidies from central and local budgets decreased from 6.9% of GDP (includingdirected banking credits) in 1996 to 2.1% in 2001 (of which roughly 1% consistedof subsidies to industrial enterprises). But while there has undoubtedly been realprogress, part of the decrease in subsidisation has been virtual. We estimate that in2001 state subsidies to enterprises were still around 5% of GDP, with subsidies to

Figure 2. Share of private sector in GDP: comparison with other transition countries2000 (%).

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Figure 3. Direct and indirect state subsidies in Romania.

state-owned enterprises accounting for roughly 3–3.5% of GDP.4 These indirect statesubsidies have been provided through subsidised energy prices and state guaranteesof companies’ bank loans, of which typically 90% are repaid from the state budget.Moreover, unprofitable state-owned enterprises continue to run up large arrears to thebudget and state-owned energy suppliers.

As Figure 3 indicates, subsidies to state-owned enterprises have either beenchannelled directly from the budget or via the energy sector. Subsidies to state-owned enterprises that come directly from the state budget consist of direct subsidies,guaranteed loans, and tolerated arrears and non-payments to the budget. In addition,state enterprises have been implicitly subsidised via low energy prices and paymentarrears to state-owned energy suppliers. Low energy prices obviously also benefitfinal consumers, as well as private enterprises. The energy companies, however,would not have been able to provide subsidies on such a large scale if theythemselves had not received massive subsidies from the state. These include directsubsidies, guaranteed loans and the tolerance of arrears and non-payments of budgetobligations, but also foregone profits and royalties to the state. The latter two resultnotably from the fact that prices for domestically produced gas are administrativelyset below prices for imported gas. The foregone profits of state-owned enterprises inthe energy sector (which would belong to their owner, the state) and the royalties onnatural resource extraction the Romanian government waived are de facto subsidies.

An important problem resulting from the large amount of subsidisation inRomania is that it has allowed the survival of unrestructured and inefficient state-owned enterprises, even when their value added is actually negative. In addition,artificially low energy prices have led to wasteful over-consumption of energy andsub-optimal investment decisions with respect to the energy efficiency of newly-in-stalled technology. As an example, highly subsidised energy prices have delayed theupgrading of inefficient electricity and heat generation plants and leaking energytransport systems, and the installation of thermostats for heating.

Large SOEs Are the Root Cause of a Huge Build-up of Arrears in the Economy

In past years arrears have been pervasive, reaching 42% of GDP at the end of 1999

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Table 2. Evolution of total arrears (% of GDP)

1997 1998 1999 2000

Total 33.66 36.15 42.22 40.67Budget 8.99 11.52 12.29 12.51Wage arrearsa 3.81 3.30 5.22Inter-enterprise arrearsa 15.06 15.27 18.26 24.25

of which: � 3-months 7.70 8.45 10.45Bank arrears 5.80 6.06 6.44 3.91

Note: aInter-enterprise arrears include wage arrears in 2000.Source: Ministry of Finance.

and stagnating at around 40% of GDP since then (Table 2). The slight decreasebetween 1999 and 2000 was mainly due to a fall in arrears to banks following therestructuring of the banking sector. Abstracting from inter-enterprise arrears, wheredata to some degree are inflated by double accounting, the largest part of paymentarrears is to central government and social security funds (Figure 4). Wage arrears(which have been a pervasive problem in many of the former Soviet republics) arerelatively low in Romania. It is especially noteworthy that a third of inter-enterprisearrears are owed to state-owned companies in the energy sector.

State-owned enterprises are not only the main victims of low payment discipline,however: they are also the primary offenders. While by the end of 2000 fully privatecompanies had total payment arrears of 14% of turnover, the corresponding figure incompanies with state participation was 53% (Table 3). The difference is even moremarked for arrears to the state (including state and local budgets, social security andoff-budget funds), where arrears for private companies were 2.9% of turnover, whilethe figure for enterprises with state participation was 21%. It is interesting to see that

Figure 4. Arrears by type of creditor (% of total arrears, June 2001; totalarrears � 339,971bn lei).

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Table 3. Comparison of arrears in private versus state-owned enterprises, 2000 (% ofturnover)

Partially state-ownedFully Fully Total Total

state-owned State � 50% State � 50% private state economy

Inter-enterprise arrearsa 21.12 56.34 28.73 9.34 28.80 14.17Social security arrears 5.30 3.28 9.92 0.94 6.25 2.28State budget arrears 12.50 4.83 21.91 1.86 13.86 4.86Local budgets arrears 0.27 0.27 0.91 0.07 0.45 0.17Bank arrears 1.78 5.07 7.50 1.77 3.87 2.29Total 40.99 69.80 68.97 13.98 53.23 23.77

Note: aIncluding wage arrears.Source: Ministry of Finance.

the worst offenders were not those enterprises that were fully state-owned (mostlyRegies Autonomes) but those with partial state ownership, suggesting that even astate minority shareholding allows enterprises to enjoy comparatively soft budgetconstraints.

Part of the explanation for the striking difference between the private and thestate sector is that on average fully private enterprises are smaller. Private enterpriseshave been more seriously exposed to hard budget constraints that are politically andsocially less costly to enforce in smaller entities, and have a more limited ability toaccumulate arrears with impunity than larger, state-owned firms. But the mostimportant difference between the private and the mixed sector is probably that partlystate-owned enterprises are often those that have been in the pipeline for fullprivatisation without full divestiture of the state interest in the company. In such asituation, managers and workers have little incentive to restructure and hard budgetconstraints are even more difficult to enforce.

This is also suggested by the evolution of arrears in the different sectors aftermost direct subsidies had been cut in 1997. Arrears as a percentage of turnover(Figure 5), both in the fully state-owned Regies Autonomes and in the partiallystate-owned companies, increased significantly in 1998, in parallel with the generaldeterioration in the economy. The arrears of fully state-owned entities did, however,roughly stabilise thereafter, while those of the partly state-owned entities continuedto rise sharply. One possible explanation is that supervision by the respective lineministries prevented further slippage in the Regies Autonomes. In contrast, the StateOwnership Fund did not seem able adequately to control the several thousandcompanies under its responsibility, and management and workers exploited thissituation to increase their rents.

In Appendix Table A1 we present key data for a selection5 of large state-ownedcommerical companies, which document how companies, in spite of running hugelosses over recent years, have been able to keep on producing, partly through directstate subsidies but mainly by accumulating arrears. The large majority of thesestate-owned companies have been extremely unprofitable in recent years (and stillare). Direct subsidisation has been mostly low since 1997, with the notable exceptionof the mines.6 It is stunning that, in spite of the subsidies, the mines have beenrunning huge yearly losses, sometimes amounting to several times their turnover.While all companies have to some degree suffered from non-payments, their overduereceivables have generally been relatively low, especially when comparing them to

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Figure 5. Evolution of arrears by type of ownership (% of turnover).

the payment arrears they accumulated over the corresponding period, and mainlybetween 1998 and 2000. It is this build-up of arrears that has allowed them to covertheir losses and hence continue to produce. As Figure 6 shows, the change in netarrears (that is arrears minus receivables) between December 2000 and December2001 was, for most enterprises, strikingly close to the loss they incurred in 2001.

Another striking feature is the degree to which some of these companies(admittedly among the most problematic in Romania) have been (and are) adding netnegative value. The ‘true cost’ to the Romanian budget of these enterprises isroughly equal to the state subsidies plus the incurred loss (which is mainly financed

Figure 6. How moribund large SOEs survive: losses vs. changes in arrears, 2001 (bnlei).

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Figure 7. ‘True cost’ per employee vs. wages (euros).

by arrears to the budget and other state-owned enterprises, in particular the energysector, as shown above). Comparing the ‘true cost’ per employee with average netwages shows that the former is often a multiple of the latter—especially but notexclusively in the mining companies (see Figure 7).

The financial situation in companies or Regies Autonomes outside the energysector (see Table A2) with at least some public service nature has been relativelybetter. The main constant exception has been RomArm, where a large part of theemployees, recorded as technically unemployed, continued to receive wages foryears. Tarom, the national airline, has equally been incurring large losses, especiallyon domestic flights. The railway companies, as well as the road administration andthe construction company Drumurilor, have also benefited from subsidies, and to acertain extent from payment arrears in years when they were loss-making. The mostproblematic point about the public utilities in Romania is that wages are often wayabove the national average. This feature is especially striking for the companies andRegies Autonomes that are under the control of the Ministry of Industry andResources, and to some degree for those controlled by the Ministry of Transport (seeTable 4). It seems highly questionable whether a supposed higher level ofqualification of employees in these enterprises can really justify differences of thisorder. The thesis that employees of these companies hold Romanian society hostagein order to extract rents for themselves appears more plausible. The high wages inthese companies appear especially out of place when they are compared with the lowwages in the police and the judiciary, considering that low wages in these areas areoften considered to foster corruption.

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Table 4. Comparison of public sector wages with national average (January 2002)

Number of Average wage Ratio to nationalemployees (lei per employee) average wage

Total economy 3,671,588Public sector 463,759 5,282,203 1.44Ministry of Industry 256,689 6,253,984 1.70

of which:Energy sector 177,518 6,354,152 1.73Mining industry 67,573 6,137,700 1.67

Ministry of Transport 116,469 4,760,604 1.30of which: Railways 101,349 4,723,460 1.29

Ministry of Agriculture 39,896 3,137,746 0.85of which: Padurilor (forestry) 28,959 2,519,254 0.69

Posta Romana 34,976 3,082,970 0.84Enterprises under APAPS (16)a 34,509 3,632,527 0.99

Note: aEnterprises under Authority of APAPS included in the list of 86 enterprises under special supervisionby the Ministry of Finance.Source: Ministry of Finance; APAPS.

The Specific Problems of the Energy Sector

A large proportion of the arrears has been concentrated in the energy sector. Theproblem has been that electricity, gas and heating prices were administratively setbelow production costs, as political considerations overruled the suggestions of theonly formally independent regulation authorities to set realistic prices. Compensatorystate subsidies were largely insufficient and not always paid on time. Heat productionunits were especially affected, as their prices, by and large, only covered a fractionof their production costs. As a consequence, heat production and distribution unitshave been running up large arrears to their suppliers, especially the gas distributioncompanies (Distrigaz Nord and Distrigaz Sud) and Termoelectrica (Table 5).

In addition, payment discipline of consumers of electricity and central heatinghas been weak. Until recently this problem was aggravated by the fact that, for socialor political reasons, entities related to the state could not be disconnected to enforcepayment. While households have been relatively reliable in paying, enterprises andpublic customers have been less disciplined. Large loss-making state-owned enter-prises have been among the worst payers.

By February 2002 the 30 largest debtors among heat production units had run uparrears of more than 3 trillion lei (or around 0.3% of GDP) to the two gas distributioncompanies (Distrigaz Nord and Sud). This represented respectively 25% and 65% ofthe gas distribution companies’ turnover in 2000. At the same time, the 12 largestdebtors among heat distribution companies had accumulated arrears of 4.2 trillion lei(0.4% of GDP) to Termoelectrica, this representing 32% of Termoelectrica’sturnover in 2000 (Table 6).

Among the industrial companies, the 20 largest debtors7 had together accumu-lated arrears of 0.9, 1.9 and 5.2 trillion lei to Distrigaz Nord, Distrigaz Sud andElectrica respectively (representing 28%, 54% and 32% of 2000 turnover of thelatter). While a couple of the largest bad payers from industry are private companiesthat have somehow managed to avoid being cut off from further energy supplies, theoverwhelming majority are companies where the state is the controlling or at leastan important shareholder.

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Tab

le5.

Fina

ncia

lan

dpe

rfor

man

cein

dica

tors

inen

terp

rise

sof

the

ener

gyse

ctor

Cha

nge

inSu

bsid

ies

Gua

rant

eed

Mon

thly

net

arre

ars

cred

itw

age

per

Em

ploy

ees

Tur

nove

rPr

ofit

Rec

eiva

bles

Arr

ears

(arr

ears

�em

ploy

ee

rece

ivab

les)

(net

)

bnL

eibn

Lei

%of

%of

%%

oftu

rnov

era

%%

oftu

rnov

er%

ofm

nU

S$E

uros

turn

over

turn

over

chan

gech

ange

turn

over

2001

2000

2000

2001

2000

2000

2000

–01

1997

2000

2000

–01

2000

–01

2000

2000

2001

Dec

–01

Ele

ctri

ca32

,932

16,3

31�

1467

�95

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00

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city

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ribu

tion

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lect

rica

27,3

6413

,223

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20�

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b10

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.9c

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c0.

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ctri

city

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uctio

n

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1900

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00

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uctio

n

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es:

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b RE

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nteg

rate

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lect

rici

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nctio

nal

lines

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re20

00).

c The

senu

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clud

e12

,400

bnle

iof

arre

ars

ofT

erm

oele

ctri

cato

the

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etan

dst

ate-

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tten

off

in20

01.

d RO

MG

AZ

(Int

egra

ted

gas

com

pany

that

was

split

upal

ong

func

tiona

llin

esbe

fore

2000

).So

urce

:M

inis

try

ofFi

nanc

e;M

inis

try

ofIn

dust

ryan

dR

esou

rces

;A

PAPS

;IN

SSE

.

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Table 6. Aggregated arrears of the largest debtors to the energy sectorcompanies, January 2002

Arrears (bn lei) Months overdue

Arrears of heat producing companiesto Distrigaz Nord 830 3.8to Distrigaz Sud 2370 9.8to Termoelectrica 4202 4.7Arrears of other industrial companiesto Distrigaz Nord/Sud 2868 7.5to Electrica 5230 15.1

of which:State-controlled 6899 12.8With state participation 312 16.0Private 279 10.7Not identified 609 11.1

Source: Ministry of Finance.

While arrears to the energy sector are enormous, the problem of non-payment isconcentrated. A large majority of enterprises and households by and large pay theirbills for electricity, gas and heating, as witnessed by average collection rates of theenergy sector companies of between 80% and 95%. The problem is a core of large,usually loss-making and almost exclusively state-owned enterprises. This is high-lighted by the fact that the 20 largest industrial debtors of Electrica account foraround 70% of the total overdue receivables of the electricity company (Table A3).The same picture emerges for the gas sector, where the arrears from the 30 largestdebtors among the heat production companies and the 40 largest industrial debtorsaccount for around 80% of the overdue receivables of the two gas distributioncompanies (Table A4).

To be fair, it should be mentioned that under IMF pressure the Romaniangovernment in 2002 took a number of steps to improve the situation in the energysector, the most important being a significant increase in energy prices. While thisprice increase has reduced the subsidisation via low energy prices, its effect has beenpartially offset by the fact that non-payments for energy have further increased sincethe price rises.

Restructuring, and Especially Liquidation, Is Problematic Because of Social andPolitical Pressures

When Romanian governments have tried to implement privatisation and restructur-ing, they have faced considerable social and political pressures, as trade unions arepowerful and very politicised in many state-owned companies. This is reflected in thefact that wages in the state sector in general, and sometimes even in unrestructuredloss-making state-owned industrial companies, are substantially higher than wages inthe private sector. As a result, employees in loss-making state-owned companiesstrongly resist losing their jobs. On several occasions in the past, employees’ actionshave obstructed privatisation by denying privatisation advisers or interested investorsaccess to the enterprise’s premises or to financial information.

Typical examples of the obstacles to restructuring and privatisation are the cases

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of Tractorul and Roman. Tractorul and Roman are, respectively, the largest produc-ers of agricultural machinery and trucks in Romania. Both are located in Brasov, anindustrial stronghold in communist times, where currently 20% of workers are stillemployed in companies awaiting privatisation, restructuring and/or liquidation.

Tractorul, in spite of having reduced employment from roughly 13,500 in 1997to slightly below 5000 at the end of 2001, has continued to accumulate extraordinarylosses in recent years. In 2000, while more than 5% of turnover was subsidised,losses amounted to almost two-thirds of turnover. This is equivalent to a yearly lossof roughly 6000 euros per employee, or roughly four times the yearly average netwage. Losses have been financed by running up arrears to the budget and suppliers.The situation worsened in 2001 when higher subsidies were allocated. More pre-cisely, the Ministry of Agriculture and Forestry promised to subsidise 55% of thesale price of tractors sold by Tractorul to Romanian agricultural enterprises. Pro-duction increased but the financial situation worsened since the subsidies weredisbursed with (sometimes large) delays. The volume of receivables rose sharply alsobecause of delays in payment from individual buyers: they more than doubled from25% of turnover at the end of 2000. Concomitantly, arrears that already amountedto almost 150% of turnover in 2000 increased by more than half.

Tractorul has been on the privatisation list for years, but its privatisation has beenresisted by vested interests (of trade unions, suppliers and agricultural lobbyists). Toattract investors and curb opposition to privatisation, the company was broken up in2000 into nine different entities, to be privatised or liquidated separately. However,three core parts have since been merged again on the grounds that their complemen-tarities will better meet potential investors’ interest and were offered for sale inMarch 2002.

Roman, the truck producer, where employment decreased from roughly 13,000 in1997 to slightly above 9000 at the end of 2001, has been making huge losses for anumber of years. This is not surprising, as international competition in this sector isfierce and producers have typically a global dimension. Obstacles to privatisation arethe same as at Tractorul, with the additional difficulty that Roman has become anational symbol, being the only company in Romania that stood up againstCeaucescu by staging a strike. By mid-2002 the company was in the process of beingsplit up.

Following a large rally of workers at Roman and Tractorul in May 2002 againstthe government and the ruling party, the government promised that in 2002 subsidiesfor tractors would be provided in advance. Moreover, the opening of privatisationbids for the six companies derived from Tractorul (in a holding scheme with‘Tractorul’ and APAPS as the shareholders) was delayed to August 2002. Finally,the government promised that the restructuring and privatisation processes forTractorul and Roman would take place with limited job losses, that the Interior andDefence Ministries would order trucks in the near future, and that Petrom (inprinciple a private, listed company, though majority state-owned) would buy 300trucks from Roman.

Another obstacle to privatisation comes from local authorities, which usuallyprofit from employment in state-owned enterprises in their locality, even when thelatter are loss-making. This dependence is higher in distressed regions, wherealternative employment opportunities are scarce. Ahrend & Oliveira Martins (2003)show that employment in state-owned enterprises is not evenly spread across regionsbut heavily concentrated in half a dozen problem regions, where up to 30% ofworkers are still employed by state-owned enterprises.

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Tab

le7.

Mai

nre

veal

edco

mpa

rativ

ead

vant

ages

byse

ctor

,19

90–2

001

Exp

ort

Impo

rtsh

are,

2001

(%)

shar

e,20

01(%

)19

9019

9319

9619

9920

0020

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umul

ativ

e19

9019

9319

9619

9920

0020

01C

umul

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e

84W

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pare

l7.

0911

.36

17.6

321

.32

19.9

921

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24.4

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1.70

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75�

7.11

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12.9

412

.94

85Fo

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2.06

2.45

5.13

6.24

5.91

6.98

8.57

32.9

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Sour

ce:

INSS

E.

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Figure 8. Shift in trade specialisation.

The New Private Sector and SMEs Are Crucial to Employment Creation andExports

Despite the crowding-out of resources by the unrestructured sectors, Romania hasactually a rather dynamic layer of small and medium-size enterprises (SMEs). Theircontribution to employment has grown impressively. By 2001 SMEs accounted forroughly half of total employment, compared with 24% in 1995, and represented 56%of total turnover in the economy. While this increase in the role of SMEs issignificant, there is potential for further development, given that this sector hasbecome dominant in the economies of most OECD countries.

The sectors where SMEs are dominant have also become the main drivers ofexports. Table 7 displays the structure of trade flows by revealed comparativeadvantages (RCA).8 In one decade there has been a tremendous change in thespecialisation of the Romanian economy. In the early years of transition Romaniaintensified its specialisation in the heavy industries (e.g. iron and steel), ‘benefiting’from the previous large industrial base and an overvalued exchange rate thatfavoured cheap imports of energy and raw materials. But the true forces ofcomparative advantage of Romania rapidly emerged through increasing specialis-ation in labour-intensive light industries. By 2001 the main RCAs were in the appareland clothing industries, footwear and furniture. These three sectors accounted for37% of exports in 2001.

This development of trade flows, mainly with Western Europe, was madepossible by the favourable preferential agreements between the EU and the candi-date countries, as well as intensive subcontracting with European firms (mostly fromItaly and Germany). With this shift in trade specialisation, Romania is now lessdependent on energy imports to sustain the export sector. However, the counterpart

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Figure 9. SME development in Romania compared with other transitions countries.

is that it has to import large volumes of intermediate inputs used in the processingindustries (Figure 8), such as textile yarns and leather.

Induced by trade liberalisation, the changing structure of the Romanian economyis also reflected in the flows of employment and business creation and destruction.Between 1995 and 2000 there was a net decrease of employment in the largeenterprise sector (employing more than 250 employees) of over 1.5 million jobs (seeOECD, 2002b for details). As could be expected, job destruction is concentrated inthe traditional sectors, such as machinery and equipment, agriculture, construction,yarn fabrics (which are imported now under the sub-contracting contracts), miningand metal industries. Meanwhile, all of the employment creation in the economytook place in the SME sector, with a net increase of nearly 700,000 jobs. Apparel andclothing is the only manufacturing sector contributing heavily to this increase, witha net creation of over 100,000 jobs, other jobs being created mainly in the servicesectors (distribution, repair and maintenance). The gap between employment creationand destruction resulted in a net loss of over 800,000 jobs over a 5-year period (ora decrease of 25% in the number of employees). However, in spite of the positivecontribution of the SME sector to economic transformation, its relative size inRomania is still small compared with the other transition countries. The share inemployment of the SME sector in Romania is especially below the levels found in

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many other Eastern European countries, as is a special SME index developed byUNECE (see Figure 9).

Part of the explanation for this relatively slow development in Romania isprobably connected with the low income level of the population. SMEs are usuallyespecially important in the service sector, whose development, in turn, is oftenclosely linked to the income level of a country. However, even in comparison withcountries with a similar income level (e.g. Bulgaria) the Romanian SME sectorremains relatively underdeveloped. It seems therefore that both a difficult businessclimate (including pervasive arrears) as well as high tax pressure on the official andprofitable part of the economy have played an important role in constraining thedevelopment of the SME sector. In this respect the development of the SME sectorhas been negatively affected by the large SOE sector, which has been the main causeof the payment arrears and through its constant drain on state resources hascontributed greatly to the heavy tax pressure on the SME sector.

Conclusion

This article has portrayed the developments in the large SOE and the SME sectorsin Romania during transition. It has focused on showing the link between the lackof progress in large enterprise restructuring and macroeconomic performance. Weargue that pervasive arrears and high tax pressure on the profitable official part of theeconomy have slowed down the development of the SME sector, and henceconstrained both the speed of the economic transition and growth. We have also,based on micro-data, shown concretely how the energy sector in Romania has beenused to channel subsidies to moribund large SOEs, which have thereby been able tosurvive for more than a decade in spite of being highly loss-making. It seems,however, that such subsidisation has not been restricted to Romania but may be awidespread feature in transition, and especially in former Soviet republics, thatcertainly deserves far more attention and research than it has attracted so far.

Notes

1. For important contributions to the current debate about whether and under what circum-stances privatisation increased enterprise efficiency see e.g. Djankov & Murrell (2002) orLizal & Svejnar (2002).

2. Often under the pressure of IMF agreements.3. Typically under ‘isolation programmes’ all overdue debt was frozen until agreements

with all debtors were concluded. Wage arrears could only be paid once a company hadgenerated sufficient cash internally to cover them. Most programmes offered severancepackages for workers who were made redundant that could also be used for retraining.Enterprises under isolation were monitored by a special monitoring unit on a monthlybasis. The programmes were limited in time, and those enterprises that had not beenturned around at the end of the ‘isolation period’ were supposed to be liquidated throughbankruptcy procedures initiated by their creditors.

4. A rough estimate is that in 2001 direct subsidies to enterprises were around 1% of GDP(roughly half of this supporting public passenger transport). Guaranteed credits were US$1 bn (approximately half of which went to the energy sector). Assuming that, as in thepast, 90% of guaranteed loans will have to be paid back from the state budget, thisimplies an indirect subsidy of 2.4% of GDP. Arrears to the budget increased onlyinsignificantly in 2001 because 12,400 billion lei (around 1.1% of GDP) of debt fromTermoelectrica and its suppliers to the budget were written off. The IMF estimates that

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foregone royalties and profits in the gas sector for 2001 (basically the quantity ofdomestic gas production multiplied by the difference between the domestic wellheadprice and import prices) reached US$ 1381 bn (3.7% of GDP). Adding this up, oneobtains total subsidies of around 8% of GDP, out of which roughly 6% are channelledvia the energy sector. Taking 40% of this (as somewhat below half of energy consump-tion is private), and adding the direct subsidies for public transport, one finds thatsubsidies to the population have roughly been 3% of GDP. Splitting the remainder ofsubsidisation via the energy sector equally between the private and state (non-energy)enterprise sector (the private industrial sector is larger but more energy efficient), andassuming that half of direct subsidies went to state-owned enterprises (outside energy andtransport), and adding to this 1.2% of guaranteed loans (outside energy), one mayconclude that state enterprises (outside energy) were subsidised on the order of 3–3.5%of GDP. This leaves 1.5–2% of subsidies for the private enterprise sector.

5. This selection consists basically of those large SOEs with more than 1000 employees thatare clearly pursuing industrial activities without any public service character or anyrelation to national security and that were loss-making in 2000.

6. In spite of a significant decrease in direct state support after 1997, the mines generallystill receive sizeable state subsidies.

7. Of each Regie Autonome company considered.8. Following Neven (1995), the revealed comparative advantages are computed as follows:

RCAi �� Xi

�Xk�

Mi

�Mk�·100

where Xi and Mi are, respectively, the exports and imports of product i. This indicator isbounded between 100 and � 100. The lower and upper limits of the index can be attainedonly in the (theoretical) case when there is complete trade specialisation and thereare only two goods. Under real world circumstances, the value of the index rarelyexceeds 10 (in modules). The higher the value of the index the stronger is tradespecialisation.

References

Ahrend, R. & Oliveira Martins, J., ‘Policy Interdependence during Transition—The Case ofRomania 2001/02’, OECD Working Paper, 2003.

Djankov, S., ‘The Enterprise Isolation Program in Romania’, Journal of ComparativeEconomics, 27, 2, June 1999, pp. 281–293.

Djankov, S. & Murrell, P., ‘Enterprise Restructuring in Transition: A Quantitative Survey’,CEPR Working Paper, No. 3319, 2002.

Lizal, L. & Svejnar, J., ‘Privatisation Revisited: The Effects of Foreign and Domestic Ownerson Corporate Performance’, paper presented at the European Economic Associationmeeting, Venice, 2002.

Negrescu, D., ‘A Decade of Privatisation in Romania’, in C. Ruhl & D. Daianu (eds),Economic Transition in Romania: Past, Present and Future (Bucharest, World Bank andRomanian Centre for Economic Policies, 2000).

Neven, D., ‘Trade Liberalisation with Eastern Nations: How Sensitive?’, in R. Faini & R.Portes (eds), European Trade with Eastern Europe: Adjustment and Opportunities(London, CEPR, 1995).

OECD, Russian Federation (Paris, OECD Economic Surveys, 1997).OECD, Romania (Paris, OECD Economic Surveys, 1998).OECD, Slovak Republic (Paris, OECD Economic Surveys, 1999).OECD, Russian Federation (Paris, OECD Economic Surveys, 2002a).OECD, Romania—Economic Assessment (Paris, OECD Economic Surveys, 2002b).

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Petri, M., Taube, G. & Tsyvinski, A., ‘Energy Sector Quasi-Fiscal Activities in the Countriesof the Former Soviet Union’, IMF Working Paper WP/02/60, Washington, DC, 2002.

Pinto, B., Drebentsov, V. & Morozov, A., ‘Dismantling Russia’s Nonpayments System—Cre-ating Conditions for Growth’, World Bank Technical Paper No. 471, Washington, DC,2000.

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Tab

leA

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Tab

leA

2.L

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Reg

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2014


Tab

leA

3.T

hela

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ovem

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2014


Tab

leA

4.T

hela

rges

tde

btor

sof

the

gas

dist

ribu

tion

com

pani

es,

Janu

ary

2002

Arr

ears

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ploy

ees

Act

ivity

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ners

hip

Num

ber

%%

Profi

ts/

(200

1)T

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onth

sof

turn

over

loss

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nle

i)co

nsum

ptio

n20

0020

00

DIS

TR

IGA

ZN

OR

DH

eat

prod

uctio

npl

ants

(13)

830

3.8

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Stat

e-co

ntro

lled

DIS

TR

IGA

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eat

prod

uctio

npl

ants

(17)

2370

9.8

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Stat

e-co

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DIS

TR

IGA

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DU

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n.a.

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Stat

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Che

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51 2

2 N

ovem

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2014


Tab

leA

4.T

hela

rges

tde

btor

sof

the

gas

dist

ribu

tion

com

pani

es,

Janu

ary

2002

—co

ntin

ued

Arr

ears

Em

ploy

ees

Act

ivity

Ow

ners

hip

Num

ber

%%

Profi

ts/

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1)T

otal

,m

onth

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over

loss

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nle

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nsum

ptio

n20

0020

00

DIS

TR

IGA

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ical

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4.8

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ical

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onil

176

n.a.

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mic

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creative destruction or destructive perpetuation: the role of large state-owned enterprises and smes...

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