Eu extends Eastern boundary

On 1 January 2007 the European Union welcomed another two countries and
swelled its ranks to 27 member states. With the accession of Bulgaria and
Romania the EU has completed its fifth – but not final – wave of enlargement.

Romanian transition
Romania has the second largest population of all central and eastern European
countries. Its economy is growing fast as it meets the various economic and
legal criteria necessary for accession to the EU, making it an increasingly
attractive destination for inward investment. In fact, in 2005 Romania’s GDP
grew by 4.1% to an estimated euro 79bn (£52.2bn). This was largely due to 9.9%
growth in GDP in the construction sector and 8.1% growth in services. These
sectors contribute 54.8% of all GDP.

Romania’s transition to a market economy began in 1989 and, according to the
European Commission, it had created a “functional market economy” by October
2004. State-owned companies still produce a significant percentage of Romania’s
GDP, but efforts are underway to privatise and restructure several strategic
sectors.

Several energy sector companies were privatised in 2005. The national oil
company Petrom has been sold to the Austrian oil company OMV, while Romania’s
largest commercial bank, Banca Comerciala Romana, is to be taken over by Erste
Bank.

But other areas in the country’s development are lacking and the Romanian
government is still working to strengthen the rule of law and democracy,
individual freedoms and economic and social cohesion. Furthermore, the country
is still fighting corruption.

Since 2003, the number of foreign investors has increased significantly. In
2005, the euro 5.2bn net inflow of foreign direct investment represented 6.6% of
GDP – up 27% on 2004. About half of this is attributable to privatisations. A
number of public private partnerships are also being launched to bring about
infrastructure improvements. Foreign direct investment is expected to increase
again in 2006, thanks largely to increased macroeconomic stability, EU accession
and a flat tax rate.

Investment incentives are available to foreign and domestic investors as a
way to boost Romania’s economic development and accelerate privatisation in the
oil, gas, energy and other sectors. These are available for investments with a
significant impact on the economy, investments in disadvantaged areas or in
industrial parks and for small and medium size enterprises. However, foreign
investors should exercise caution when planning investment since the incentives
have been subject to frequent changes in recent years.

Long road for Bulgaria
Bulgaria applied for EU membership in 1995 and the accession process began in
February 2000. It has already made huge strides to bring its laws into line with
EU legislation, with more than 90% of laws already harmonised.

Bulgaria has also made significant progress in terms of privatisation: 70% of
Bulgaria’s employees now work in the private sector; the banking sector is
almost entirely privatised; and the state telecoms company has now passed into
private ownership. There are also concessions to be granted in the energy and
resources sectors.

Bulgaria has gained a BBB investment rating from Standard & Poor’s and
Fitch, and EU accession is likely to give further impetus to foreign investment.
The International Monetary Fund projects growth at 5.5% for 2006. Germany and
Austria are currently the most significant investors in Bulgaria, along with
Greece and Turkey.

According to Ernst & Young’s European Attractiveness Survey, Bulgaria
ranked 15th in Europe in 2004 in terms of attracting foreign direct investment,
gaining 2.3bn euros (11.7% of GDP). This represented 2.2% of all foreign direct
investment in Europe in 2004.

Common issues
Iain Batty, head of the commercial practice in central and eastern Europe for
law firm CMS Cameron McKenna, says there are two main categories of investor
going to the two countries:

• Those investors that want to exploit opportunities in the local market to
sell their products and services to local consumers; and
• Companies that want to take advantage of a relatively cheap, but skilled
labour force that can produce goods for the local market and for export more
cheaply.

Batty says that there is a lot of investment by foreign companies that want
to use local providers in Romania and Bulgaria for IT and other outsourced
services. “The level of IT expertise in Romania is outstanding,” says Batty.
“Romanian IT expertise actually makes up quite a significant chunk of Silicon
Valley’s workforce,” he says. The level of competence in spoken and written
English is also very high.

But Batty warns that companies and investors need to be cautious before
moving in too quickly. There are two issues in particular that companies should
be aware of. For example:
• Red tape – both countries have made great strides to honour rules about
modifying local laws to reflect EU regulations. “The legislation in place is not
as straightforward as it looks on paper,” says Batty. “It goes without saying
that companies should employ a local team of lawyers to check that the necessary
paperwork is in order before committing to investing in the region.”
• Organised crime and corruption – this has been a long-term problem since both
countries embraced capitalism. Bulgaria is still ranked as joint 57th in
Transparency International’s latest corruption perceptions index, while Romania
is ranked at joint 84th.

Useful links
For more information, visit CMS Cameron McKenna at
www.law-now.com

Transparency International at
www.transparency
.org
Foreign & Commonwealth Office at
www.fco.gov.uk