Vol. XI No.12
December 2006



Who Profits from the Property Fund Listing Delay?...

In the December 2005 and April 2006 issues of the Romanian Digest™, we discussed the Property Fund – Romania’s attempt to provide restitution to the victims of the wrongful and abusive confiscations of their homes and properties by the Communist authorities after 1945. We expressed the hope that the Fund would be an extraordinary opportunity for the Romanian authorities to right the wrongs imposed upon owners of pre-communist era properties where those properties could no longer be returned in-kind under the restitution law regime outlined under Laws Nr. 10/2001, as modified under Law 247/2005. Government Decision Nr. 1481/2005 was enacted to set up the Fund and provide for the possibility of compensation to such "former owners" through grants of shares in the Fund in proportion to the value of their successful claims. We viewed the Property Fund as an example for other European nations grappling with restitution issues – a unique moment when Romania could be held up to the world as a paradigm of virtue. The Fund has been organized as a "closed-end" financial investment company which issues shares in settlement of restitution claims. Upon receiving the shares, the recipient becomes a shareholder in one of Eastern Europe's largest funds. The Fund currently has a portfolio of shares in some of Romania’s best-known institutions, with the total assets currently held by it estimated at almost €4 billion. However, the implementation of the Fund has been delayed for many months thereby indirectly benefiting powerful business interests in ways that this article explains.

[ Up to Contents ]

The Delay in Listing the Fund
The most immediate concern is the Property Fund's listing on the Bucharest Stock Exchange, without which the Fund's shares cannot be freely transferable. Based on a questionable interpretation by some of the existing laws, an entity may not become listed with the Bucharest Stock Exchange before the companies in its portfolio are all listed. Some of the largest companies in the Fund's portfolio, such as the National Lottery, the National Printing House, Transelectrica and Transgaz are not currently listed. In the circumstances, without legislation permitting the Fund to be listed with entities in its portfolio that are not yet public, listing would be many years away – and the fruits of restitution would become ephemeral to most claimants who are already quite old.

Cognizant of this problem, the Romanian government prepared an ordinance that contains a series of measures to reduce the burden placed on the Fund in order for it to be listed with the Bucharest Stock Exchange, or impose a temporary and official market for the sale of the Fund's shares until such time as the Fund is listed on the Exchange. Since July, the adoption of the Ordinance was described by the Government as "imminent'' and the text of the draft Ordinance was posted for a few months on the Government’s web site at www.cancelarie.ro . Nevertheless, the Ordinance has not yet been adopted.

While the ordinance has languished for six months under a shroud of silence in Romania, claimants have grown increasingly concerned about the lack of progress in listing the Fund. They question the Government’s resolve and ponder the reasons for the postponement of the Fund’s listing. Unfortunately, such delays have also indirectly supported certain powerful local business interests who are concerned about the effect of the Fund on the liquidity of their own holdings in public companies and who have continued an effort to find a means to capitalize upon a €4 billion Fund that is about to emerge in their backyard.

[ Up to Contents ]

Considerations in Creating the Fund

In the period since July, critics of the Fund who had been silent since its implementation reemerged to find fault with various aspects. Virtually all of them are engaged in disingenuous political rhetoric offering neither responsible alternatives nor solutions that could ever be implemented.

Like any idea, the Property Fund is not perfect. But it is a well balanced solution to differing constraints. Those constraints require that any restitution solution:

  1. must involve a quick and easy payout (or cash equivalent) given that most claimants are elderly and will not live another 10-15 years before they might redeem a bond or similar instrument of lesser value;
  2. must be acceptable from the perspective of the National Budget, i.e., a manner in which such payments can be made without Romania being forced to pay €4 billion in cash;
  3. does not endanger the long run borrowing capacity of Romania – particularly when Romania must self-finance €3.5 billion per year in order to be awarded EU grant money (a direct cash payment would imply, in effect, the renunciation of a year’s worth of such grants -- €3.5 billion means, e.g., 400-600 km of highways -- a social cost no government can afford to pay);
  4. not impact inflation -- a rapid cash payment of several billion euros would have a devastating effect on inflation and the balance of payments -- the beneficiaries of restitution represent approximately 0.5-1% of the whole population, but with a cash payment solution, compensation would, in effect, be made by the contribution of all the other citizens of Romania who would be unfairly subjected to rampant inflation as a sort of collective punishment.

[ Up to Contents ]

Fund Benefits Threaten Illicit Activities
The persons who first conceptualized the Fund not only considered the above-mentioned constraints, but sought to develop a method for restitution that would turn a burden into an opportunity. And from this point of view the Fund offers several significant advantages to Romania.

The Fund represents an important vehicle to strengthen the market economy by bringing capitalist principles to Romania’s common people. What the Thatcher Government did in the UK over time would be done overnight in Romania by making over 150,000 people shareholders in a listed company. Moreover, the listing of the Fund will introduce real corporate governance into the state controlled energy sector. The current public outcry regarding the Romanian energy industry would not be so dramatic if proper and transparent corporate governance methods would have been in place at the time of privatization. Most significantly, the Fund will reduce the importance of the State and its political control of the Romanian economy by what is, in effect, a virtual privatization. Political interference in the market would almost completely evaporate since the Fund’s board of directors would only make decisions based on sound business principles. The listing of the Fund will eliminate much of the opaque ability of elements of the Romanian business community to manipulate aspects of the Romanian economy.

For the Fund’s supporters, it was clear from the beginning that the real fight would be carried on in this front against the neo-communist and conservative groups, and against those who in one way or another benefit from the state companies. Understanding this, allows one to appreciate why the Fund has been so harshly attacked by representatives of these concerns and why progress on the adoption of the necessary ordinance has been frozen under a shroud of silence.

[ Up to Contents ]

Benefiting from the Vouchers for Shares Swap
A major factor in delaying the Fund’s listing has been its effect upon the business opportunities related to the swap of vouchers for Fund shares. Some claimants entitled to receive compensation have been receiving since 2003, vouchers from the Ministry of Finance. These vouchers are tradable and the final owner is entitled to exchange them for share’s in the Fund. From the beginning, these vouchers have been traded at huge discounts since, initially, nobody knew when and how they could be exchanged for cash. After the process of listing of the Fund accelerated (initially expected in the early summer of 2006), the standard discount of approximately 70-80% of face value fell to about 40% in May 2006. Immediately after the process was frozen, the discounts went up again to 70%. In this respect it is worthwhile to note the reversed correlation between these discounts and the prices of the SIFs. It appears that many people are moving resources from one to the other. Also, while only a relatively limited number of vouchers have been issued -- most of the €4 billion claims are still to be issued -- a delayed listing of the Fund’s shares allows more vouchers to be “produced” and the owners, with no other cash alternative, presumably will be keen to sell via a private transaction even at a huge discount.

Obviously, the persons buying the vouchers on the market have benefited from the delay in listing the Fund’s shares – while, reprehensibly, elderly claimants wait for their rightful restitution, many in a squalor produced by the very thefts for which Romania has committed to compensation. But the ability of these interests to effectuate delays appears to far outweigh the pleas for justice from the victims of communism.

[ Up to Contents ]

Disingenuous Criticisms
A considerable amount of public criticism of the Fund has focused upon the method by which compensation is determined. In what can only be seen as a deceitful assertion, these critics question how, e.g., €20 million can be assessed on a claim for an asset that was sold by the State for only €2 million. Clearly, the claimants seek restitution for what was stolen, not what the government did to it – good or bad – in the sixty years that followed. Yet these critics prefer to attack the government asking how it could compensate someone for 10 times what the government received for the same asset in privatization – ignoring the fact that it obviously is NOT the same asset. Valuation is determined using independent auditors who use the book value of the stolen properties on the date of their confiscation as its value and, by means of the consumer price index, arrive at a current value. While this does not take into account the additional entrepreneurial and business opportunity value that the confiscated companies may have had, it is nevertheless a fair method of valuation, particularly in light of how the non-listed companies in the Fund’s portfolio are valued.

Indeed, critics of the Fund have also focused upon the methods used to value the Fund itself. On the one hand, about half of the companies in the portfolio are listed. For them, their market value is easy to calculate. The rest of the companies are among the preeminent companies in Romania, mostly involved in energy, oil & gas and infrastructure -- a true cross section of the Romanian economy. These companies are valued at their book value. The critics who suggest that this is undervalued ignore the fact that all of the privatizations of similar companies in Romania (and abroad for that matter) have produced market values significantly higher then the book values. And these companies entered into the Fund’s portfolio at the net asset value, with the asset value at the historical book value. In light of this, it is wrong to suggest that the Fund’s shares will automatically plunge below face value, particularly with Romania entering the EU (meaning a higher sovereign grade) and within the context of a continuous economic boom expected to last for many years by the rating agencies.

But this then gives rise to the concern of some critics that by claimants receiving shares based on the nominal value of the Fund they are obtaining a windfall since the actual value is quite likely higher. Undeniably, the formula does not (in most cases) capture the entrepreneurial value and the business opportunity value of a non-listed company which can only be assessed by the buyer himself. But the claimants are not being compensated at these values in the determinations made as to the book value of their confiscated assets because they are also unknown amounts. For example, in the recent Transelectrica privatization, a prestigious international consultant, with fully defendable arguments, put a value on the shares at the initial public offering which the market then proved was more than three times less then the actual market value – and this was within one month of the IPO. Transelectrica is part of the Fund’s Portfolio.

Since the valuation made of the assets stolen from the claimants does not take into consideration the entrepreneurial value and the business opportunity value of that property, it is only fair that similar hypothetical assessments of such values in the non-listed companies in the Fund should not be considered. How can you fairly value restitution if you use one means of valuation for the stolen asset and a different one for the one you intend to use as a substitute in compensation? Claimants are entitled to the same calculated method of valuation in determinations regarding the market value of assets. Just like lost opportunities during the past 60 years are not compensated for in the Property Fund, or no money is offered for the oceans of unhappiness from those arbitrary confiscations, so too, the State is not entitled to value more than the book value of the shares in companies that it proposes to substitute as compensation.

Finally, there are a few self-proclaimed representatives of a segment of claimants who have been quite vocal in the Romanian press in attacking the very idea of restitution through the Property Fund. They label it as a ruse and a means to avoid real compensation. They are wrong, and the fallacy of their assertions is demonstrated in this article. Sadly, however, these few ill-informed claimants have colored the perception of many Romanians who now mistakenly believe that the Fund is an inadequate means for restitution. This segment of uninformed claimants has inadvertently played into the hands of the nefarious groups of profiteers who buy interests at discounted rates.

[ Up to Contents ]

The Fate of the Fund
What will happen if the government fails to enact the ordinance and commence listing of the Fund soon? First, we believe that no matter what government holds office, no government can close Pandora’s Box. The Property Fund must be listed before long. Having acknowledged the value of its debt to the claimants in decisions from AVAS and, most significantly its obligation to provide compensation through the issuance of titles by the Government, Romania cannot drag its feet or change its mind in regard to the Property Fund and expect the whole matter to just go away. Romania has officially acknowledged its obligation to compensate the claimants for a sum certain and either it uses the Property Fund to make those payments or it must do so in cash. If it fails to act expeditiously, alternative means to convert the titles into effective compensation will be taken and they will succeed.

While elderly claimants are, quite literally, dieing off waiting for justice, a praiseworthy and principled plan is being turned on its head and sullied through politics and folly. The voices of the victims of communism quietly appeal for justice. Does anyone in Bucharest hear them?

[ Up to Contents ]

Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2006 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

societate civila de avocati
Str. Putul cu Plopi, Nr.7, Sector 1
Bucharest, Romania
Tel: (40) (21) 311 14 60
Fax: (40) (21) 311 14 65
E-Mail: office@hr.ro

The Romanian Digest Archive



Herzfeld & Rubin, P.C.
125 Broad Street
New York, NY, 10004
Tel: (212) 471-8500
Fax: (212) 344-3333

Herzfeld & Rubin LLP
1925 Century Park East
Los Angeles, California 90067
Tel: (310) 553-0451
Fax: (310) 553-0648

 Chase, et al.,Herzfeld & Rubin, LLC
5N Regent Street
Livingston, New Jersey 07039
Tel: (973) 535-8840
Fax: (973) 535-8841

Israeli Affiliated Law Firm
Balter Guth Aloni & Co.
96 Yigal Alon Street,
Tel Aviv, 67891, Israel
Tel: +972-3-511-1111
Fax: +972-3-624-6000


New York — California — New Jersey — Romania
If you no longer wish to receive emails from us, please send an e-mail with UNSUBSCRIBE in the subject line to Romanian.Digest@hr.ro.