European funds absorption, a brief overview – RBD Apr 2012

19 April 2012

Managing Partner – EU ADVISORY

RL-foto-Japan-4 (1)There is widespread clamour in Romania about an entire society being so close to miss a major target, a major opportunity in times of crisis and not only: the structural and cohesion European funds, designed to help the block’s second-poorest member to catch-up faster with Western economies.

Statistics from ACIS / European Affairs Ministry (MAEur) show a mixed picture – a bleak one for the masses (including most of the journalists) and a complicated one for the initiated, with only minor improvements from one month to another, from one quarter to another. The “effective” absorption rate (money reimbursed by the EU) grew to a mere 6.3% at end-March 2012, while the “gross” absorption rate (internal one that keeps account on pre-financings paid to EU-bound projects from the State Budget) stood at 16.2%. However, contracted projects rate stood at a healthy 67.5% and the approved projects rate at 77%!

Being involved in EU funds financings for investment projects (SME-s & corporations in industry, agro-food, medical, tourism and IT) for more than 9 years already, I hope my “anecdotal evidence” described below with some case studies and some personal experience will help the reader – by a kind of  “abstractization” (from particular to general) – understand the ground situation behind the stats more deeply.

So we are back in 2005 when SAPARD pre-adherence money for agriculture and agro-food were the main driver for European funds in Romania and ECE: a success story from those years sounds like that…

A locally middle-sized sausage maker came to us. He had just tried the “local way” – talked to a “preferred consultant” (read good insider relation at the then Agency) and to a friend who was a top manager of a local bank for co-financing. After more than 1 year of efforts, his project was rejected due to poor quality (even the “preferred” consultancies seem to be blocked by EU rules, as clerks risk to lose their job if not evaluating properly). And his credit approval from two local banks also stalled. He was stunned and shocked because in 1-2 years time, his non-standard sausage factory would have been closed by the new EU rules for food safety. Our entrepreneur even got some paranoia accents, thinking that the situation came from “enemies” with stronger political ties…

However, the said entrepreneur had an “Evrika moment” and decided to come to some quality consultants from the “open market”, so he approached us. In less than 5 months, he got an approved SAPARD project for a new EU-standards, HACCP meat & sausages plant, relying on a EUR 2 mn grant and a EUR 2 mn investment credit. The latter was also approved under market conditions: he had to choose among 2 of the 3 banks approached by us. After 3 years, he invested in a second factory for ready-meals, also with FEADR money (structural funds post-SAPARD, under PNDR M123). Today, his company is a second-tier one among the largest sausage producers: their sales boomed from EUR 4 mn annually to a EUR 20 mn threshold per annum, consolidated a strong brand: it delivers mainly in key account chains; in consumers’ reviews, the company and its main brands often get 1st in customer satisfaction and quality analyses.

So those were the “Romantic times” in Romania’s EU absorption funds story. How is the situation nowadays? In many respects, the issues presented above developed a lot – the opportunities broadened, became more diversified, EU procedures became widely known, albeit not “for the masses”. However, the development has unfortunately been not only for the better, but also for the worse!

There are still success stories, with parts of the one above replicated, however less story-like for me.

But the main hurdles for the PRIVATE SECTOR today are 4 – the order is mine (it is my perception), as well as the 4th one = read my “attack” to the local private sector MORALE (or lack of it) in this country. I said it is mine as in ALL Romanian press I only read praises to the local private sector and critique to the Gov.

1) BUREAUCRACY: Even though the EU rules have become obvious and well known among the “initiated” (people who have already run EU-funded projects, consultants, banking officers, bureaucrats themselves), there is a propensity in Romania to INVENT new redundant “rules”, tones of redundant paper and sometimes to interpret locally some very clear guidelines. The Subsidiarity criterion of the EU was hence interpreted by many Romanian agencies as a
green-light to punish and humiliate Applicants and their Consultants with stupid rules that are often in conflict with the “umbrella” public policy and even organic national Laws.

2) BANK CREDIT availability: Romania is a proud EU member now, not like in 2005. Banks are in private hands: apart from only 4 Romanian-capital ones (2 state-run / 2 private), all the rest to 42 Banks have a “mother” bank in Western Europe; and even the Greek subsidiaries here now look better after their “mommies” got unscathed by the Greek orderly default earlier this year. BNR is tough enough: the last banking bankruptcy dates as far as 1999 (Turkish-Romanian Bank). However, after the Lehman Bros’ episode in 2008, credit for companies and especially for SMEs got thinner and thinner. Locally and EU-wide and globally! We now face an un-functional money and credit market, with surplus liquidity offered by the Central Bank only to see the State making crowding out. Local entrepreneurs are refused with stupid arguments and sometimes are just harassed while the banking clerks do not have the courage to say a plain NO to their face.

3) RED TAPE by the Government Agencies: As I said in no. 1 above, there are EU-inspired necessary rules and also redundant ones. But now there is also a corpus of educated and skilled clerks/ bureaucrats who could use their talents to speed up absorption of EU funds ! …and very often they do it, by helping a poor farmer fill in properly the files a.s.o. But there is also the Honey-Pot (read those areas with a very high competition = from 3 on 1 to EUR 10-20 worth of applied projects for every EUR 1 in budgeted grants per scheme). The problem is that for the major projects, those clerks have established a closed “eco-system” with their insiders (many politically-nominated), their “independent evaluators” and their “preferred” consultants. And hence the desired LEVEL PLAYING FIELD is NO longer a reality!!!

4) The last but not least, after lashing out at the Government guys, a 4th and major factor is the LOW MORALITY of the local “businessmen” and “entrepreneurs”. I’m referring to the median one, not the happy exceptions. But even the ones awarded by top Business magazines could be there! Many of them make “window shopping” when approaching a consultant; many of them do not pay for the intellectual services rendered. They steal information and incomplete services as window-shoppers, then they make the papers with new-entrants at dumping consulting fees.

Talking the lack of moral standards, I could also add here the branch of Consultants (in EU funds, else) who are not very far from the level of morality of the entire private sector. As a whole, nevertheless, they fare a little better due to their intellectual skills and educational background, while many of the local entrepreneurs are the result of the “swampy” years of the ‘90s (our eternal transition without clear-cut privatizations); or they are the “smart boys” who connected their firms to a local budget.

These are in brief the main causes that put Romania so far behind in EU funds absorption. And I only talked about the bright side of them: the private-sector driven projects, I avoided talking on the public ones (applied by mayoralties, county councils, Transportation or Environment Ministries a.s.o.).

Radu Limpede

Aceasta analiza a aparut in Aprilie 2012 in revista Romania Business Digest / Doing Business in Romania http://rbd.doingbusiness.ro/en


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