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10. Although we have made some progress in absorbing EU funds, further efforts are still required to meet our goal of absorbing an additional €6 billion during 2012. We are monitoring the implementation of the May 2011 Priority Action Plan and have submitted two progress reports to the European Commission. In order to significantly boost absorption this year, we have identified high priority projects, strengthened the capacity of management authorities, and taken steps to reduce procedural bottlenecks. In particular, we have submitted for review an updated priority action plan to the Commission including measures to increase transparency and a Code of Conduct for personnel working with EU funds. To strengthen the capacity of management authorities, 100 vacant and 160 newly-created positions will be filled by June 2012. We have also limited the time to process reimbursement claims to beneficiaries to 45 working days across all management authorities. To enhance the technical expertise of managing authorities, we have already signed the MOUs with EIB and the WB for receiving technical assistance, and a new MOU will be signed with EBRD by end-March.
Structural Reforms
Regulatory and Strategic Reforms in Transport and Energy
16. We are making progress on our plans for major reforms in the transport and energy sectors to enhance economic growth in Romania. In the transport sector, we are developing a new general transport strategy and master plan for Romania, which will balance increasing demand and available fiscal means, ensure complementarities between the different transport modes, and define priorities for medium- and long-term investment. We plan to complete a draft by [end-March 2012]. Expenditure cuts and arrears clearance schemes have improved the financial position of SOEs in the transport sector. We will continue to seek additional measures to raise revenues and reduce costs (including through the application of standard costs). We are finalizing plans for a government-guaranteed loan to clear CFR rail infrastructure arrears to energy providers by end-June 2012 and thereby realize significant savings through the cancellation of penalties. These efforts will be complemented by the development by end-March 2012 of ways to improve revenue generation and management of the real estate of the various transport sector SOEs, possibly through the establishment of a special real estate company. In addition, we will immediately initiate steps to reconstitute the boards of directors and hire private management in SOEs as required by the Corporate Governance law of November 2011. Finally, we have closed 1,000 kilometers of underutilized rail line bringing the total network under management of CFR closer to our goal of 15,500 line kilometers.
17. For the energy sector, we plan to enhance the pricing and regulatory framework by undertaking the following steps[1]:
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· We have drafted legislation to transpose the EU 3rd Energy Package into Romanian legislation. The draft provides for an appropriate unbundling regime and the definition of vulnerable consumers. Before approval we will agree with the European Commission, the World Bank, and IMF on necessary amendments to ensure full financial and operational independence of the energy regulator (ANRE). Though somewhat delayed compared to our original plan, we will approve the legislation by government ordinance [by mid-February 2012].
· We remain committed to achieving full functioning of energy markets to ensure proper incentives for energy investments and improvements in energy efficiency crucial for future economic growth. We will now start implementing the earlier agreed phasing out of regulated prices in electricity and natural gas, in full compliance with EU regulation. By February 15, 2012 we will send to the European Commission, World Bank, and the IMF the English translation of the full roadmap including all relevant specifications, particularly measures to protect vulnerable consumers and ensure competition. As soon as fully agreed with the IFIs we will approve the legislation to implement the roadmap by emergency ordinance (prior action).
· In the electricity sector, we will implement the annual adjustment in regulated electricity tariffs (delayed this year) of at least 15 percent by end-February to compensate for increased costs due to lower hydroelectricity output. Together with ANRE, we will begin implementing by end-March 2012 the phase-out of regulated prices in the electricity market [with quarterly steps as specified in the TMU] to full deregulation of non-household consumption by end-2013 and of household consumption by end-2015.
· In the gas sector, the price adjustment s for nonresidential customers implemented in recent months (including a 5 percent increase effective January 1) have left prices still below the constant unitary gas (CUG) cost recovery formula. We are committed applying the remaining [15 percent] price adjustment needed to reach the CUG in quarterly steps by end-June. Thereafter, adjustments will take place quarterly (as specified in the TMU) until reaching [the average wholesale EU gas price/the parity with EU spot markets] by end-2013. In parallel, we will accelerate the ongoing negotiations process on the Intergovernmental Gas Agreement (IGA) with Russia and will also strive to take steps to diversify our gas supply. [A sentence about the authorities renegotiating the price with Russia via the EU]. For households, price adjustment will be implemented gradually between January 2013 and [end-2015], together with the application of a scheme to protect the most vulnerable consumers. Gas price adjustments will be accompanied by a renegotiation of production royalties and taxation to preclude windfall profits to current producers while providing full incentives for increased exploration and production. Finally, we are fully aware that a parliamentary override of the presidential veto of the gas export ban law could lead to the suspension of the program, as it contravenes basic principles of the EU single market. We will actively seek to avoid such an override.
· The process to terminate all bilateral energy contracts has started. Those that cannot be terminated in the short term are currently being renegotiated to ensure that the duration will not be extended, quantities are reduced, and prices are adjusted as permitted to market conditions. In addition, the Ministries of Economy and Justice are assessing options to terminate all existing bilateral contracts and will inform the IFIs about our findings by end-February. New bilateral contracts will continue to be made transparently and non-discriminately through OPCOM (electricity) and other competitive procedures (gas) and terms of the contracts will be published. We continue to explore the possibility to develop a trading platform for gas.
· We will prepare by end-March a report on final end-consumer prices for district heating compared with those recommended by the regulator and those budgeted by municipalities. We will also review municipality payments of arrears and invoices related to heating. This will allow us to assess whether recent legal changes have improved the financing of the district heating system in Romania.
State-Owned Enterprises
18. We continue to implement measures to improve the performance of SOEs. We [met] the fourth quarter indicative targets on the operating balance and arrears in key companies. While we have achieved major improvement in some companies, more substantial measures remain to be taken. Most restructuring plans for the central government SOEs have been submitted but the quality of these plans varies. By mid-[February] 2012 line ministries will send revised plans to the MOPF in accordance with guidance given by staff concerning aim and content of these plans for all entities with more than [20] employees or a turnover of more than [1] million lei in 2010.
19. On privatization, our goal remains to offer minority and majority stakes in a series of companies over the coming months. We will seek professional advice on the overall strategy and streamline the administrative framework for privatizations with the aim of attracting the best advisors and achieving the highest possible price in a market-friendly manner. As noted in our last Letter of Intent, the transaction consultants will have the task of drafting evaluation reports, and recommending and justifying the offer price of the shares in view of a successful closing transaction. Our planned privatization actions are as follows:
· The first group of companies to be offered by end-April 2012 includes: i) Oltchim (sale of remaining public shares to strategic investor), ii) ii) Transelectrica (SPO of a 15 percent stake plus a later capital increase of about 12 percent), iii) Transgaz (SPO of a 15 percent stake); iv) Posta Romana (minority stake), v) Cuprumin (full privatization), and vi) CNH (sell viable mines to strategic investor).
· The second group of companies includes i), ii) Romgaz (IPO of a 15 percent stake), iii) Electro Serv (majority privatization of company created by the merger of Transilvania Sud, Transilvania Nord, and Muntenia Nord), and; and iv) Tarom (IPO of 20 percent). Appointment of transaction advisors for this group will be completed by April 2012.
· The third group comprises i) Hidroelectrica (IPO of 10 percent to increase capital); ii) Electrica Serv (majority privatization of all remaining regional companies); iii) Nuclearelectrica (IPO of at least 10 percent via capital increase); iv) S.C. Electrica Furnizare S.A. (including the supply activity transferred from SC Electrica SA, majority privatization); v) the three remaining Electrica distribution subsidiaries ([majority] privatization); and vi) CFR Marfa (majority privatization). Appointment of legal advisors for this group will be concluded by end-April.
· The following companies will be offered for privatization by end-December 2012/early 2013: (i) the new energy producer Hunedoara, to be created by April 2012 by merging the power plants in Paroseni and Mintia and purchasing the four viable mines of CNH (majority privatization), (ii) the new energy producer Oltenia to be created by merging SNLO and the three energy complexes in Craiova, Rovinari and Turceni (majority privatization), and (iii) Elcen Bucuresti (majority privatization).
20. In addition to the privatizations, we continue preparations to resolve the financial situation of Termoelectrica. Valuable assets will either be extracted via forced execution by ANAF or be sold and the remaining part of the company will be placed into voluntary liquidation [prior to completion of the fourth review] [prior action].
21. We have begun to implement the requirements of our general corporate governance law, the passage of which marked a significant improvement in the framework for SOE corporate governance in Romania. In the Ministry of Economy, we have solicited and received bids for a firm to assist in the process of selecting private management for key SOEs that remain under majority government ownership. New management teams and board members will be selected by end-April 2012 to take office as soon as legally possible thereafter. In cases where significant minority stakes are to be sold, this timetable may be adjusted to allow for participation of the new minority shareholders. For SOEs under the Ministry of Transport and Infrastructure the corresponding process will be started by [end-February]. To make this effective, this may require changing Emergency Ordinance 3/2011 only for the new private managers, allowing for market-based salaries to attract qualified applicants. We remain firmly committed to increasing the number of SOEs with private management in the course of 2012.
23. We are committed to improving entry into retail markets to maintain a competitive environment, encourage innovation, and increase efficiency. [In this regard we have eliminated in early February 2012 undue barriers for opening large surface retail stores.] We will undertake a Report on Observance of Standards and Codes (ROSC) on corporate insolvency systems and creditor rights in early 2012.
[1] If EU infringement procedures require faster action, we will comply with their requirements.
