OECD Review of the Corporate Governance of State-Owned Enterprises in Romania

Report

27 January 2023

1. The state‑owned enterprise landscape in Romania

Abstract

This chapter first discusses the Romanian business environment and capital market before providing an overview of the state‑owned enterprise sector – including information regarding its size, sectoral distribution, and economic and financial performance. It then outlines the legal and regulatory frameworks bearing on SOE governance, including details on the general corporate governance framework as well as on sectoral laws and regulations applicable to SOEs. It finally describes ownership arrangements and examines how the state exercises its ownership rights, with a particular focus on policies and practices underpinning board and executive appointments, performance monitoring and financial oversight of SOEs.

1.1. Economic and political context of Romania

Romania is located in South-eastern Europe, bordering on the Black Sea. It has a population of 19.3 million people as of 2020 (OECD, 2022[1]). It is a unitary state with a central government under which regional and sub-regional authorities exercise delegated powers. The intermediate administrative level consists of 41 counties.1 Lower-level administrative units are categorised as either ‘towns’ or ‘communes’. Romania joined the North Atlantic Treaty Organisation (NATO) in 2004 and the European Union (EU) in 2007.

	2018	2019	2020	2021*
	Current prices RON billion	Percentage changes, volume (unless stated otherwise)
Real GDP growth	951.7	4.2	‑3.7	6.3
* Private consumption	607.3	3.9	‑5.1	4.1
* Capital formation	200.4	12.9	4.1	7.5
* Experts of goods and services	398.4	5.4	‑9.4	11.3
Inflation rate, average consumer prices		6.8	3.8	5.3
General government fiscal balance (% of GDP)		‑4.4	‑9.3	‑8.0
General government gross debt (% of GDP)		44.5	59.4	62.4
Unemployment rate (% of labour force)		3.9	5.0	5.1
Current account balance (% of GDP)		‑4.9	‑5.0	‑6.5
GDP per capita (EUR – current prices)	10 500	11 520	11 360	..
At-risk-of-poverty rate (% of total population)	32.5	31.2	30.4	..

Note: * Estimate made in late 2021.

Source: OECD (2022[1]) OECD Economic Surveys: Romania 2022, https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-romania-2022_e2174606-en and Eurostat.

Economy. After a difficult transition to a market-based economy in the 1990s, and notwithstanding current weaknesses caused by the COVID‑19 induced crisis, Romania’s economy has improved significantly over the last decade. In less than 20 years, Romania has reduced the gap in GDP per capita to the OECD average by half, from close to 70% to around 35% (OECD, 2022[1]). That said, the crisis hit the economy hard as GDP fell by 3.7% in 2020 before surpassing its pre‑crisis level in 2021 (Table ‎1.1). In its 2022 Economic Survey of Romania, OECD recommends a strong commitment to structural reform, bolstered by the availability of funding connected with the EU Recovery and Resilience Plan, to return the Romanian economy to a long-term trajectory of growth above the European average (OECD, 2022[1]).

The risks facing Romania’s economy include inequality and fiscal sustainability. Despite the progress achieved so far, Romania has the second-lowest GDP per capita (at EUR 11 360) among EU member states and likewise, according to Eurostat estimates, one of Europe’s highest shares of population who are at risk of poverty. While Bucharest and many secondary cities have become hubs of prosperity and innovation, poverty remains widespread in rural areas. In addition, while Romania’s government debt at just over 60% of GDP is not in itself alarming, the persistent public budget deficits raise concerns about debt sustainability that will need to be addressed in the medium term.

Government. Romania is a semi-presidential republic, with a division of powers between parliament and the president’s office as established by the Constitution of 1991. The head of state is the President, elected for a period of five years and eligible for a second term. The current president has served since 2014. Parliament is bicameral, consisting of a Senate with 136 seats and a Chamber of Deputies with 330 seats. Members of both chambers are directly elected by party-lists and serving for a period of four years. The head of government is the Prime Minister who is appointed by the President with the consent of parliament. The Council of Ministers (Romania’s cabinet) is appointed by the Prime Minister.

Following parliamentary elections in December 2020, the largest parliamentary party is the Social Democratic Party (PSD) with 29.3% of the votes for Senate and 28.9% of the votes for the Chamber of Deputies. In second place came the National Liberal Party (PNL – 25.6% and 25.2% respectively), followed by the USR-PLUS Alliance2 (15.9% and 15.4%) and the Alliance for Unity (AUR – 9.2% and 9.1%). The current government is a “grand coalition” including the two largest parties whose leaders have agreed to serve as Prime Minister on a rotating basis. The current office holder is Mr. Nicolae Ciuca who heads the PNL; he will cede the post to the leader of the PSD in May 2023.

Legal system. Romania is a civil law jurisdiction wherein the national Constitution and acts of parliament are the primary source of law. Because Romania is an EU member state, its legal system treats EU law as binding. Structurally, the judicial system comprises three instances for civil, administrative and criminal matters: 188 local courts (judecatorii); 41 country courts (tribunale); 15 Courts of Appeal (curti de apel); and the High Court of Cassation and Justice, which is the court of last instance. A number of specialised courts also exist, including family courts and commercial courts, as well as a separate military court system. The Constitutional Court of Romania acts as an independent constitutional jurisdiction and is not part of the ordinary court system.

Business environment. Romania ranked 55^th out of 190 countries in the 2020 version of the now-discontinued World Bank Ease of Doing Business report, and 51^st out of 141 economies in the Global Competitiveness Index (GCI) 2019 (Figure ‎1.1). Whilst hardly impressive, these rankings do not differ significantly from the respective indices’ ranking of other post-transition economies in like circumstances. With respect to integrity, Romania ranked 66^th out of 180 countries (with 1 being the best and 180 the worst) in Transparency International’s 2021 Corruption Perceptions Index.

Figure ‎1.1. Business climate indicators in Romania

Capital market. The Bucharest Stock Exchange (BVB) was re‑established as a public interest institution in 1995 after a long period of inactivity. In 1997, the exchange listed the first companies of national importance and created the first stock market index BET. The exchange was demutualised and became a joint‑stock company in 2005. The BVB also merged with Rasdaq, the Electronic Exchange of Securities from Bucharest that same year. In 2010, the BVB became a listed company with its shares trading on the Regulated Market. In 2015, the exchange launched the AeRO market, a multilateral trading system (MTS) dedicated to serving SMEs. By the end of 2020, 72.17% of BVB’s share capital was in the hands of Romanian institutional investors, 5.25% was owned by foreign institutional investors and 19.96% by Romanian private individuals.3

The Bucharest Stock Exchange operates two markets: the Main Market, which is the regulated market, and the alternative trading system, the AeRO market. The Main Market targets large mature companies, whereas the AeRO market is designed for SMEs. To become listed on the Main Market, companies are required to be legally structured as a joint‑stock company and to have a minimum market capitalisation of EUR 1 million. In addition, companies are required to have at least a 25% free‑float and a minimum of three years of financial reporting history. There are specific requirements for the three tiers of the Main Market: Premium, Standard and International.

The AeRO market is designed to serve the needs of SMEs. A company wanting to list on AeRO needs to have an anticipated market value of at least EUR 250 000 and a minimum of 10% free‑float or at least 30 shareholders. Companies seeking to raise capital on this market have to be established as a joint‑stock company (SA) prior to the listing. Specific requirements apply to companies listed on the three tiers of the AeRO market: Premium, Standard and MTS International.

By the end of 2020, the Main Market of the BVB listed 76 companies, of which 54 (71%) were listed on the Standard tier, 19 on the Premium tier and three on the International one. The market capitalisation of the Main Market totalled EUR 28.8 billion, with EUR 1.7 billion in the Standard tier, EUR 15.6 billion in the Premium and EUR 11.5 billion in the International tier. The AeRO Market listed 242 companies of which 222 (92%) were in the Standard tier. The market capitalisation of this segment totalled EUR 1.2 billion. Importantly, 18 companies listed on the BVB were identified as SOEs.4 Of these, nine were listed on the Main Market (three on the Standard tier and six on the Premium tier) and nine on the AeRO market (all on the Standard tier).

The Romanian equity market is still in a developing stage. When compared to EU and other peer countries, its market capitalisation to GDP and its turnover ratio are the lowest. However, it is worth mentioning that developing the capital market has been one of the Financial Supervisory Authority (FSA)’s main objectives since 2014. An important milestone for the Romanian capital market was the upgrade from Frontier to Secondary Emerging market status by the global index provider FTSE Russell. The reclassification as Secondary Emerging market increases the visibility of the Romanian stock market and decreases the country risk premium since the new status places Romania in the investable universe of a wider range of investors. In addition, a series of measures were adopted to increase transparency and ease market access overall, raising the attractiveness of the local capital market.

Figure ‎1.2. Market capitalisation and turnover (end of 2020)

With respect to investors, as of early 2020, private corporations and holding companies was the largest investor category holding 30% of the listed equity in Romania. Their relative importance as owners in the equity market is higher compared with other European peer countries and the EU. The public sector ranked second owning 29% of the total market capitalisation. Institutional investors held 15% of the listed equity in Romania, a relatively low participation compared with their importance in other European markets such as Germany, Hungary and Poland where they own around 30% of the listed equity. In terms of ownership structure, the Romanian stock market is fairly concentrated. In six of every ten listed companies, the largest single shareholder holds over 50% of the equity capital. This level of control and concentration is much higher than in other European countries. Around one‑third of the listed equity was in the hands of foreign investors.

1.2. Overview of the Romanian state‑owned sector

1.2.1. Number and type of state‑owned enterprises

There is a sizeable state‑owned enterprise sector in Romania. According to data provided by the Ministry of Finance, as of end 2020, the state‑owned stakes (between 1%‑100%) in 860 enterprises, of which 410 were majority-owned (with the state owning at least 50% of the ordinary share capital or voting rights). Out of the remaining 450 enterprises, 205 had state holdings of between 10%‑49% of shares or voting rights, which implies that in some circumstances they could be considered as SOEs under the terms of the OECD Guidelines on Corporate Governance of State‑Owned Enterprises (the “SOE Guidelines”).

It is important to note, however, that as of 2020, 194 majority-owned (and 88 minority-owned) SOEs were in insolvency proceedings. According to the provisions of Law no. 85/2014 on insolvency, these firms are considered inactive (and exempted from corporate governance requirements). The remainder of this report focuses on the 216 active majority-owned SOEs under the oversight of central government institutions, and on the legal and administrative provisions applicable to them.

1.2.2. Legal forms of SOEs

State‑owned enterprises in Romania can basically take three legal forms: (i) joint stock companies (JSCs); (ii) limited liability companies (LLCs); and (iii) autonomous administrations. The first two categories are legal forms identical to the ones found among private enterprises, as provided by Romania’s Companies Law (no. 31/1990). As mentioned above, all stock-market listed SOEs must have the form of joint stock companies. As of end 2020, there were 121 JSCs (18 of which listed) and ten LLCs in Romania.

Autonomous administrations (known as “regii autonome” in Romanian) are statutory corporations fully-owned by the state which are subject to Law no. 15/1990 on the reorganisation of state economic units as autonomous administrations and companies, with subsequent amendments. As of end 2020, there were 36 autonomous administrations in Romania. Overall, all SOEs regardless of their legal form are subject to the corporate governance provisions of GEO no. 109/2011 (as amended and approved by Law no. 111/2016), which stands as the main law on state‑owned enterprises (see section 1.3 for details).

While national research and development institutes5 also exist to carry out public policy objectives, they are exempted from the application of corporate governance provisions otherwise applicable to SOEs and are only subject to Law no. 324/2003 amending and approving Government Ordinance no. 57/2002 on scientific research and technological development. As of end 2020, there were 49 such national research and development institutes.

Figure ‎1.3. Breakdown of majority-owned and active SOEs according to their legal forms (as of end 2020)

1.2.3. Size and sectoral distribution of the SOE sector

Reflecting, in part, large‑scale privatisations in previous decades, SOEs still play an important role in the Romanian economy – in terms of their overall volume, but even more so because of their role in systemically important sectors such as energy and transportation. The total SOE sector is valued at approximately USD 19 billion and employs around 183 000 people (Table ‎1.2). Based on the table, Figure ‎1.3 and Figure ‎1.4 provide an additional overview of the sectoral distribution of Romania’s state‑owned sector.

One characteristic of Romania’s SOE landscape is that the country has an internationally very high share of statutory corporations (85 out of a total 216 active companies). However, in terms of economic weight, the picture is a bit different: the statutory corporations account for a relatively limited 14% of the sector’s total valuation and 21% of its employment. In addition, just two large firms account for a large share of the statutory corporations’ employment and equity value, namely the national property administration (RAAPPS) and the forestry service (Romsilva).

	Majority-owned listed entities			Majority-owned unlisted enterprises			Statutory corporations
	N° of enterprises	N° of employees	Value (USD mn)	N° of enterprises	N° of employees	Value (USD mn)	N° of enterprises	Number of employees	Value (USD mn)
Primary sectors	1	5 673	2 731	18	3 034	249	23	15 336	192
Manufacturing	5	3 237	243	25	10 111	235	3	731	83
Finance				9	7 485	1 988
Telecoms				3	2 171	198
Electricity and gas	2	4 032	1 832	6	18 142	4 118
Transportation	3	6 715	1 034	15	50 710	2 829	4	2 575	122
Other utilities (including postal services)				6	33 385	584
Real estate				2	46	23	1	2 073	1 306
Other activities	7	140	38	29	6 039	626	54	11 561	576
Total	18	19 797	5 878	113	131 113	10 850	85	32 276	2 280

Note: Value of enterprises denotes market valuation in the case of listed companies and book equity value for the rest.

Source: Information provided by the Romanian authorities.

Figure ‎1.4 provides an overview of the sectors in which individual SOEs are found. Like in other countries, the collectively classified “other activities” predominate, and as in other countries these companies tend to be comparatively small special-purpose entities found across all parts of the public sector. Moreover, in the case of Romania, 54 of them are statutory corporations mostly taking the form of national research and development institutes. A further large cluster of mostly small companies is found in the primary sectors, which span from the extractive industries to agriculture and forestry.

Figure ‎1.4. Sectoral distribution by number of central majority-owned enterprises (2020)

However, in terms of economic importance, the sectoral distribution is quite different. Figure ‎1.5 illustrates that in value terms, most of the state‑owned economy is concentrated in just two sectors, namely energy (which in the figure is spread over “electricity and gas” and the “primary sectors”) and transportation. By far the largest employers in the state‑owned sector are found in the transport sector (which includes pipeline operators and hence is partly linked with the energy sector) with close to a third of the overall SOE employment. This is followed by the “other utilities” which account for 18% of Romania’s SOE employment, the “primary sectors” (13%) and “electricity and gas” (12%).

These sectoral differences do to a large extent reflect the importance of a few, large state‑owned enterprises, which are described in more detail in a later section of this report. For instance, the railway sector (which in Romania includes two operating companies and one infrastructure owner) is by far the largest individual employer in the state‑owned sector, followed by the postal company and the forestry industry. In terms of valuation, again, the energy sector stands out. The electricity generators Hidroelectrica and Nuclearelectrica come first and third in terms of valuation. The natural gas producer Romgaz is second. Finally, one reason for the high values of companies related to the energy sector is that many of them are listed in stock markets, which tends to raise corporate valuation.6 The role of individual listed SOEs is reviewed in more detail below.

Figure ‎1.5. Sectoral distribution of the central SOE sector by value and employment (2020)

1.2.4. SOEs’ share of the economy

In the absence of detailed GDP figures for the state‑owned sector, the OECD relies on the share of employment to illustrate SOEs’ relative weight in the economy. An estimate is provided in Figure ‎1.6.

Figure ‎1.6. SOEs’ share of total dependent employment compared with other countries

At the national level, SOEs employ 183 181 people. As a share of the dependent employment7 this is 3.2% which is somewhat above OECD average (Figure ‎1.6), but relatively low compared with most other post-transition economies. Of note, this does not provide a full picture of state involvement in Romania’s corporate sector as the country has an unusually large number of enterprises held by regional and municipal authorities. However, these “sub-national SOEs” fall outside the scope of the present study.

1.2.5. SOEs listed in stock markets

Compared with other post-transition economies, Romania has a relatively large portfolio of stock-market listed SOEs. Overall, 18 majority-owned SOEs are traded on the stock exchange. This includes eight that are listed on the exchange’s main market and ten that are traded on the alternative trading system known as the “AeRO market”. In another eight companies the state holds sizeable minority stakes (including three on the main market and five on the AeRO Market). The state invested companies account for 14.2% of market capitalisation. Romgaz (with 70% of state ownership) is the only double‑listed SOE; since 2013 it has been admitted to trading both on the Bucharest Stock Exchange and the London Stock Exchange.

The largest and most valuable listed SOEs are concentrated in the energy sectors (i.e. hydrocarbons and electricity). Table ‎1.3 shows that, as earlier alluded to, the largest five majority state‑owned companies all fall within these sectors. So does the oil producer OMV Petrom, until recently the most highly valuated listed company in Romania, in which the state has retained a sizeable minority stake after selling the majority to Austria’s ÖMV. A complete list of stock-market traded companies with a consolidated public sector ownership of at least 10% is provided in Annex B.

Among the other four listed companies, Electrica, whilst formally categorised as a “management consultancy” firm, is actually a key player in the electricity distribution and supply market in Romania. With the state holding 48.8% of the shares, and in the absence of other large blockholders, this company would be categorised as an SOE in the sense of the SOE Guidelines since the state can effectively control it. Conversely, the state’s stake in the oil refiner Rompetrol (at 44.7%) is actually exceeded by that of another shareholder, Kazakhstan’s KazMunayGaz (which holds 48.1%).

Company name	Main sector of operations	Stock market(s) of listing	State ownership share	Market capitalisation (USD mill.; end‑2020)
OMV Petrom	Extraction of crude petroleum	Bucharest main market	20.6%	5 192
Romgaz	Extraction of natural gas	Bucharest main market and London Stock Exchange	70.0%	2 731
Nuclearelectrica	Electric power generation	Bucharest main market	82.4%	1 358
Electrica	Management consultancy activities	Bucharest main market	48.8%	1 096
Transgaz	Transport via pipeline	Bucharest main market	58.5%	840
Rompetrol Rafinare	Manufacture of refined petroleum products	Bucharest main market	44.7%	489
Transelectrica	Electric transmission and distribution	Bucharest main market	58.7%	473
Conpet	Transport via pipeline	Bucharest main market	58.7%	166
Transcom	Maintenance and repair of motor vehicles	Bucharest AeRO	48.1%	86
Antibiotice	Manufacture of pharmaceuticals	Bucharest main market	53.0%	82

Source: Information provided by the Romanian authorities.

In addition to now being among the companies in the stock markets, Romania’s listed SOEs have also played a significant role in developing the markets. A recent OECD study of Romania’s capital markets found that the four largest IPOs of all time in Romania concerned SOEs (Table ‎1.4). This was part of a deliberate strategy by various governments to use the listing of SOEs not only to enhance the governance of the companies but also to help develop the national stock markets. The large listings concerned energy companies and public utilities in the energy sector. On the one hand, this makes good sense because these companies were valuable and profitable, hence easy to bring to the market; on the other hand, it may raise some concerns about the protection of minority shareholders, since many of them are still subject to important public policy objectives that could change over time.

Issuer name	Economic sector	SOE?	Year	Proceeds (EUR mill.)
Electrica	Utilities	Yes	2014	456.2
Romgaz	Energy	Yes	2013	399.0
Nuclearelectrica	Utilities	Yes	2013	75.7
Transgaz	Utilities	Yes	2007	69.1
Sphera Franchise Group	Consumer Cyclicals	No	2017	64.0
MedLife	Healthcare	No	2016	43.4
Transelectrica	Utilities	Yes	2006	34.4
SC Teraplast	Consumer Cyclicals	No	2008	14.9
Flamingo International	Technology	No	2005	12.3
Alumil Rom Industry	Consumer Cyclicals	No	2006	8.9

Source: OECD (2022[4]), Capital Market Review of Romania: Towards a National Strategy, OECD Publishing, Paris, https://www.oecd.org/corporate/capital-market-review-of-romania-9bfc0339-en.htm

1.2.6. Economic and financial performance of SOEs

The economic and financial performance of SOEs is important on efficiency grounds, but also because some Romanian SOEs represent an increasingly important source of revenues for the state budget. In 2001, Ordinance no. 64/2011 established that at least 50% of SOEs’ net profit should be paid as dividends to the national or local budget. However, in response to growing fiscal pressures during the 2016‑19 period (where increases in public expenditures concurred with a reduction of certain taxes), the law was amended by GEO no. 29/2017 to provide that SOEs’ financial reserves may be redistributed in the form of dividends to the state of local budget.8 In addition, GEO no. 114/2018 provides that 35% of SOEs’ financial reserves found in cash should be distributed as dividends. As such, between 2016‑19, some SOEs distributed 85%‑90% of their net profits as dividends to the state budget.9

Overall, however, the growing fiscal reliance on dividends has concurred with a deterioration of SOEs’ financial and operational performance. The European Commission, which regularly monitors the situation, has attributed the decline in operational performance largely to the weakness of the governance of the Romanian state‑owned sector (Box ‎1.1). Moreover, while some SOEs do indeed remain quite profitable, most of the national state ownership portfolio is not.

Box ‎1.1. Performance of Romania’s SOEs according to the European Commission

The findings below are drawn from the European Commission’s ‘Country Report Romania 2020’ issued on 26 February 2020:

The performance of state‑owned enterprises is deteriorating. The operational and financial results of state‑owned enterprises declined substantially in 2018 and the first half of 2019. Aggregate profits, at RON 3.5 billion in 2018, decreased by 53% compared to 2017, according to the Ministry of Finance data. In particular, companies in the energy and transport sectors contribute to this situation. Arrears are also increasing again, having reached RON 4.4 billion (EUR 932 million) at the end of 2018, 11% higher than in December 2017.

The deterioration of corporate governance contributes to poor performance. Romania has a very solid corporate governance framework for state‑owned enterprises, but its implementation has been limited. Loss-making companies are not asked to restructure or modify their business plans. Debts to the state budget, social security or other state‑owned enterprises amount to 90% of all arrears by state‑owned enterprises, which represents a financial risk for the state but also demonstrates a permissive attitude from public sector suppliers and creditors. Interim boards and managers became a standard practice in most companies. The authorities applied 60 financial penalties for administrative offences under the corporate governance legislation, but the amounts tend to be symbolic. Furthermore, different Ministries and departments involved in overseeing state‑owned enterprises seem to disagree increasingly on the respective responsibilities, despite clear allocations under the law.

The future of the Sovereign Development and Investment Fund is unclear. The creation of the Fund was announced in 2017. It should receive the state’s shares in some 30 state‑owned enterprises to boost investment, but with unclear objectives or strategy. A first law was approved in spring 2018 but rejected by the Constitutional Court. In November 2018, the government addressed the Court’s concerns and adopted framework legislation. It accelerated the assessment of how to create the Fund outside the budget perimeter, but plans are unclear.

Source: European Commission (2020[6]), European Semester Country Report Romania 2020, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020SC0522&from=EN

A 2022 report by the Romanian Fiscal Council observed that while the state’s portfolio has showed positive returns on equity and assets in most recent years (albeit significantly less than private firms), this is entirely attributable to the five most profitable SOEs without which the aggregate operating result would be sharply negative. This report moreover seems to confirm the European Commission’s assessment that the situation has deteriorated in recent years. In 2019, the state‑owned companies registered an aggregate net loss of RON 1.8 billion, and while 2020 recorded a return to positive territory with a total net profit of RON 0.9 billion, this reflected one‑off government assistance to enterprises related to the COVID‑19 crisis (Romanian Fiscal Council, 2022[7]). While there is high heterogeneity in the performance of SOEs, central SOEs in the portfolios of the ministries of economy, energy and transport produce 75% of total declared revenues (74% net of subsidies) and receive 87% of total subsidies. However, when adjusted for subsidies, the profit of the central SOEs in the portfolio of the Ministry of Economy and the Ministry of Transport in particular fall into negative territory, driving down overall performance significantly (World Bank, 2020[8]).

Recent analysis by the OECD sheds further light on the relatively weak performance of Romania’s SOEs. OECD analysed a sample of 279 large unlisted companies of which 42 were identified as SOEs (defined in this study as a company where the state owns at least 20% of the share capital) (OECD, 2022[4]). A comparison of the respective size and indicators of financial performance of companies shows that while the median SOE is slightly larger than the median non-SOE in terms of asset size, SOEs underperform significantly both in terms of sales and profitability (Figure ‎1.7). To the extent that SOEs provide services that the private sector will not, or is not suited to, due to an inherently low profitability in the specific industry, this is natural and not necessarily cause for concern. However, in the Romanian case, the gap between SOEs and non-SOEs is very pronounced. The cited study argues that this is an argument for listing a number of large SOEs in the stock market with the double purpose of enhancing their performance and making the markets deeper and more liquid.

Figure ‎1.7. Financial indicators for large SOEs and private companies (not traded in stock markets)

The development of financial performance indicators in some of the largest SOEs shed further light on these findings. Figure ‎1.8 shows the rate of return on equity (RoE) of four listed and four unlisted Romanian SOEs since 2015. The figures apparently confirm the notion that unlisted SOEs have not been particularly profitable. The RoEs of unlisted SOEs have in recent years varied in a band from ‑5% to 15% compared with 0% to 20% for the listed firms, which can be expected to show a performance that is closer to their private sector peers. At the same time, the variation among firms is considerable. The most consistent performer among the unlisted firms has been Hidroelectrica (as mentioned elsewhere a top candidate for privatisation) with a RoE generally around 10%.10 Bucharest Airport was also quite profitable until the COVID‑19 induced crisis triggered major losses. Conversely, the National Property Administration statutory corporation (Regia Autonomă Administrația Patrimoniului Protocolului de Stat, RA AAPS) has been consistently loss-making for the last many years.

Additional corporate information not on display indicates that the overall poor performance of unlisted SOEs observed in Figure ‎1.8 may be in part triggered by particularly bad results in a small number of large firms. In particular, the rail freight company CFR Marfa recorded mounting deficits in 2015‑17, which wiped out its equity capital and led to a major recapitalisation.

Figure ‎1.8. Rates of return on equity in large listed and unlisted SOEs (2015‑20)

1.2.7. Perspectives on privatisation

In the context of Romania’s transition from a post-communist economy to a market-based system, Law no. 15/1990 undertook the restructuring of state enterprises into commercial companies with share capital and fully-owned autonomous administrations (regii autonome), the latter thus remaining as state property and solely operating in strategic economic sectors such as defence production, transport, energy, natural gas and mining. The law also created the National Agency for Privatisation (NAP) tasked with organising the privatisation process and ownership certificate programme (i.e. the Mass Privatisation Programme). Further privatisation efforts were undertaken by Law no. 58/1991, Law no. 55/1995 and Law no. 77/1994.

In the aftermath of the 2008 global financial crisis and as part of Romania’s commitments under the IMF-EU-World Bank economic recovery programme, efforts were made to accelerate privatisations, focusing on state‑owned companies operating in the energy sector. Through initial public offerings (IPOs), 10% of the share in nuclear energy company Nuclearelectrica were sold in November 2013, and 15% of the shares in the state‑controlled gas producer Romgaz were sold in November 2013. Both IPOs were oversubscribed and generated about EUR 450 million in gross proceeds (IMF, 2014[9]). While the Romgaz transaction was completed at the upper end of the price range, the Romgaz IPO was the first time a Global Depository Receipts (GDRs) was issued in conjunction with a public offering on the Bucharest stock exchange. A dual listing of Electrica on both the Bucharest and London Stock Exchanges was undertaken in 2014, which had a significant impact on its capitalisation and liquidity.

In the context of the COVID‑19 pandemic, privatisation efforts came to a halt in 2020, with the enactment of a two‑year ban on the sale of SOE shares that was formally motivated by concerns about having to sell state assets at artificially low prices. The ban expired in 2022.

In March 2022, the initiation of the listing of the shares of Hidroelectrica on the Bucharest Stock Exchange was approved by the shareholders (including the Ministry of Energy with 80.06% of the shares, and Fondul Proprietatea with 19.94% of the shares), with Fondul as the selling shareholders of up to 19.94% of the share held in Hidroelectrica. The listing is aimed to be completed by Q1 2023. Further, the listing of Salrom (51% state‑owned, with 49% of the shares held by Fondul) was approved by the shareholders in July 2021 and approved by government memorandum in July 2022. As part of its commitments under the EU Recovery and Resilience Plan, Romania should also list, lease or restructure at least three central state‑owned companies operating the energy and transport sectors by Q2 2026 (European Commission, 2021[10]).

1.3. Legal and regulatory framework

1.3.1. Main laws and regulations on corporate governance

Companies Law no. 31/1990

The Companies Law no. 31/1990 is the primary legislation for the corporate sector in Romania. It applies to all companies, and contains provisions regarding the management of the company, the appointment and dismissal of board members and executive managers, the composition and functioning of the management bodies and the remuneration of their members, as well as their responsibility, revocation and liability towards the company. According to the law, a company may be established as a general partnership, limited partnership, joint-stock company, partnership limited by shares, and a limited liability company.

The Companies Law was amended several times,11 with significant revisions driven by Romania’s efforts to join the European Union and introduced in 2004, 2006 and 2007 in order to comply both with the European Commission’s recommendations on corporate governance and the OECD Corporate Governance Principles.12 In particular, Law no. 441/2006 brought substantial reform by introducing two alternative corporate management systems (the one‑tier and two‑tier system), as well as significant changes to the rights, duties, attributions and powers granted to the members of the management bodies of the companies.

Overall, the main amendments in 2006 and 2007 of the Companies Law aimed at enhancing corporate governance rules regarding: board independence; the requirement for the managers to inform the board of directors of their actions on a regular basis; the clear separation between executive and non-executive directors; the right of directors to request information from executive managers regarding the daily management of the company; independence requirements for board committee members; and the duty of loyalty for directors and executive managers.

Laws and regulations on capital markets

The Capital Market Law no. 297/2004 applies to all companies listed on the stock exchange or a recognised alternative trading system. It was amended by GEO no. 32/2012 and the subsequent Law no. 24/2017 regarding the issuers of financial instruments and market operations, and by Law no. 158/2020 which implements the 2017 EU Shareholder Rights Directive II. The law applies to listed SOEs (currently 18 majority-owned and eight minority-owned (10‑49%) at the central level of government). It regulates the functioning of the financial instruments and markets, and provides for the rights and obligations of companies listed on the regulated market.

The law also defined the responsibilities of the former National Securities Commission (CNVM), which were later attributed to the Financial Supervision Authority (FSA) created by Government Emergency Ordinance no. 93/2012 approved by Law no. 113/2013 as an integrated regulatory and supervisory body for the non-banking financial market. The FSA is responsible for the authorisation, supervision and control of the insurance‑reinsurance market, financial instruments and investments market and private pensions market.

National Corporate Governance Code

The Bucharest Stock Exchange (BVB) Code of Corporate Governance includes a set of principles and recommendations which can be adopted on a comply-or-explain basis by companies whose securities are traded on the regulated market. The first code was adopted in 2001. Following Romania’s accession to the EU in 2007, a new code harmonised with European legislation was issued in 2008, recommending that issuers adopt a clear and transparent corporate governance framework, which should be disclosed to the general public. The code was revised in 2016 to enhance the recommendations around access to information for investors and the protection of shareholders’ rights, in line with Romanian and European legislation. It applies to all listed SOEs, but there is no requirement or expectation that unlisted firms adhere to it.

The code differentiates two tiers of companies – standard and premium – with corporate governance requirements being more stringent on the latter. The code imposes obligations pertaining to having majority non-executive board members, minority shareholder protection, investor relations and shareholder engagement, internal audit, and board and executive remuneration.

In particular, it comprises four sections, each including general principles, as well as “provisions to comply with”. According to the BVB rulebook, companies listed on the Bucharest Stock Exchange are required to include a corporate governance statement as a specific section in their annual report which should contain a self-assessment on how the “provisions to comply with” are observed, and include the measures taken in order to comply with the provisions that are not fully met. In accordance with the comply-or-explain principle, all cases where a company does not observe the “provisions to comply with” must be reported to the market via the company’s annual report.

As part of its monitoring role regarding the implementation of the code, the Bucharest Stock Exchange (BVB) also published a Compendium of Corporate Governance Practices and a Manual for Reporting Corporate Governance in order to assist companies to implement the Code (BVB, 2015[11]; 2015[12])

1.3.2. Legal and regulatory framework applicable to SOEs

Law no. 15/1990 on the Restructuring of State Enterprises into Commercial Companies and Autonomous Administrations

As mentioned above, in 1990, the Law on the Restructuring of State Enterprises (Law no. 15/1990) undertook the conversion of the former socialist “state economic enterprises” into (i) commercial companies with share capital, and (ii) (fully-owned) autonomous administrations (“regii autonome”). The latter were to remain state property and operate only in strategic sectors of the economy, such as defence production, rail and urban transportation, energy, natural gas and mining. According to Article 18 of Law no. 15/1990, the legal form of the company is to be established by its articles of association. Government Emergency Ordinance no. 30/1997 further introduced the reorganisation of autonomous enterprises into companies, with the aim of submitting them to a privatisation process.

Government Emergency Ordinance no. 109/2011 on state‑owned enterprises

Government Emergency Ordinance no. 109/2011 on corporate governance of public enterprises (hereafter referred to as “GEO no. 109/2011”) represents the main framework for the ownership and corporate governance of SOEs in Romania. It was introduced in the aftermath of the 2008 global financial crisis which severely impacted the Romanian economy (including SOEs) and was conditioned on financial assistance agreements with the IMF, EU and World Bank.

Prior to the adoption of GEO no. 109/2011, SOEs (referred to in Romanian law as public enterprises13) operated on the basis of Law no. 15/1990 (autonomous administrations), while incorporated SOEs operated under Law no. 31/1990 (companies). Since the former was deemed to comprise important gaps for the good governance of autonomous administrations, and the latter was deemed not adapted to the specificity of SOEs, it was considered necessary to develop new corporate governance mechanisms for SOEs, in addition to those regulated by the existing general legislation.14

According to the Romanian authorities, GEO no. 109/2011 was developed with explicit reference to OECD instruments, notably the SOE Guidelines and the G20/OECD Principles of Corporate Governance, and aimed to (i) establish transparent selection procedures for SOE board members and executive managers in order to safeguard their independence and objectivity, (ii) introduce mechanisms to protect the rights of minority shareholders, and (iii) increase transparency regarding the activity of SOEs and the state’s shareholding policy. As such, GEO no. 109/2011 introduced provisions on, inter alia, the protection of minority shareholders, internal and statutory audit, transparency and reporting requirements. GEO no. 109/2011 was amended once by GEO no. 51/2014, until it was later approved and amended by Law no. 111/2016 (see details below).

Of note, the most important objective of GEO no. 109/2011 was reportedly to professionalise SOE boards by ensuring that directors are sufficiently qualified and are independent enough to discern and promote the interests of the company. As such, the Ordinance sought to limit political intervention in the appointment process by introducing detailed rules and criteria-based procedures for the selection of directors and executive managers, which are to be applied by independent committees or human resources recruitment specialists.15 Other provisions include (i) the requirement for both boards and executive managers to draw “administration plans” outlining the company’s objectives, (ii) the requirement to establish at least two board committees, and (iii) the right of minority shareholders to contest board nominations. All the specific provisions introduced by GEO no. 109/2011 compared to the general ones of the Companies Law no. 31/1990 are summarised in Table ‎1.5.

Specific provisions	Details
Professional management	GEO no. 109/2011 requires minimum qualification criteria for the selection of SOE board members and executive management, which are not provided by Law no. 31/1990.
Procedures for the selection of board members	GEO no. 109/2011 provides for a specific process for the selection of board members and executive management, while the Companies Law entitles the boards of directors and general meetings of shareholders to decide on the selection and appointment of board members. For large enterprises, GEO no. 109/2011 requires the use of independent external consultants in the selection process. While representatives from line ministries are allowed to fill several seats on the boards, candidates are required to go through the due process of evaluation by the independent consultant.
Separation of responsibilities	According to GEO no. 109/2011, the chairperson of the board of directors cannot be the same as the general manager, whereas the Companies Law allows the general manager to act as chairperson of the board of directors, subject to the prior approval of the general meeting of shareholders.
Board and executive remuneration	GEO no. 109/2011 imposes certain basic rules and criteria for the remuneration of the company’s management structures, while the Companies Law accepts the approval of the shareholders.
Limits on the number of board members	GEO no. 109/2011 provides that one‑tier boards be comprised of at least five and a maximum of nine directors, while the Companies Law has no provisions regarding these. For two‑tier boards, GEO no. 109/2011 provides that they be comprised of between three to seven members.
Board committees	GEO no. 109/2011 requires boards to set-up at least two committees (an audit committee, and a nomination and remuneration committee), while the Companies Law only suggests that board committees can be established (except for JSCs whose annual financial statements are subject to financial audit, where the creation of an audit committee shall be mandatory).
Administration plan	GEO no. 109/2011 requires executive and non-executive directors to jointly elaborate an administration plan within 90 days of their appointment, which should be submitted for approval by the board of directors. The Companies Law does not impose such an obligation on board members.
Reporting requirements	Reporting requirements are extended by GEO no. 109/2011 compared to the standards imposed by the Companies Law. In particular, companies subject to GEO no. 109/2011 are required to have a website where they should disclose: the decisions of the general meetings of shareholders; annual financial reports; half-yearly accounting reports; annual audit report; annual directors’ report; the list of directors and their CVs; Codes of Ethics; and the remuneration report.
Protection of minority shareholders	The protection of minority shareholders is also extended by GEO no. 109/2011 compared to the standard requirements of the Companies Law. According to GEO no. 109/2011, minority shareholders with more than 10% of the voting rights may require the use of the cumulative voting method to appoint the members of the board of directors. The provision goes even beyond the Capital Markets Law applicable to listed companies, where the cumulative vote can only be requested by a significant shareholder.

Source: Ministry of Finance (2014[13]), Evaluation of the implementation of the emergency ordinance no. 109/2011, https://mfinante.gov.ro/domenii/guvernanta/rapoarte-generale-periodice

In spite of the improvements brought by GEO no. 109/2011 to the corporate governance framework of SOEs, a 2014 report commissioned by the Ministry of Finance found that, three years after the adoption of the ordinance, its application was still far below expectations. While the process of board selection and appointment provided by GEO no. 109/2011 had been carried out in 33 large enterprises by mid‑2014, most of these boards were revoked soon after by decision of the shareholders’ representatives during the AGM for various reasons – including the failure of the board to submit its administration plan in time as required, or the non-approval of the submitted plan by the line ministry. Board members removed from office were replaced with interim members, and the process had not started in more than 200 SOEs in the central government’s portfolio (Ministry of Finance, 2014[13]). The report identified several inter-related factors explaining this stalemate, including (i) lack of monitoring, enforcement mechanisms and accountability, and (ii) unclear institutional arrangements, roles and responsibilities (Box ‎1.2).

Based on these identified shortcomings, the report issued recommendations to (i) improve the performance management framework for SOEs, and (ii) establish a clear ownership structure within government. Regarding the first objective, the report recommended that – instead of having two different administration plans, one drawn by the board and one by executive management, which might encourage collusion between non-executive and executive members to set achievable goals and possibly ignore long-term objectives – the relevant line ministry first establishes a “letter of expectation” which sets out the general (short-, medium- and long-term) objectives for each company. Based on these guidelines, the board, in collaboration with executive management, should then develop a business plan and set concrete targets.

This objective goes hand-in-hand with the need to strengthen the capacities of ministries to monitor companies in their portfolio. As such, the report also recommended that each line ministry set up specialised departments – comprised of qualified professionals – to oversee and monitor SOEs, collect information and prepare regular reports on their performance, and represent the state owner during AGMs without compensation by the company they supervise for meeting attendance (which was previously the case) as it might distort incentives. In order to increase political accountability, the report also recommended that line ministries be required to regularly submit reports to the government on the implementation of GEO no. 109/2011 and on the evolution of enterprises in their respective portfolios.

Regarding ownership arrangements, the report further recommended the establishment of an independent ownership structure, in line with OECD standards, responsible for: (i) developing a state ownership policy, (ii) regularly reviewing the legal status of SOEs (including autonomous, national and commercial companies) which may change depending on SOEs’ performance, sector of operation and sectoral policies, (iii) identifying the public policies that SOEs have to carry out, and ensuring that these obligations and costs are made public, (iv) identifying SOEs for privatisation, restructuring and liquidation and organising these procedures; (v) monitoring the implementation of GEO no. 109/2011 and establishing reporting lines between SOEs and line ministries; (vi) ensuring proper representation of the state in AGMs; and (vii) monitoring the functioning and quality of SOE boards, developing instruction manuals and facilitating training programmes.

Law no. 111/2016, amending and approving GEO no. 109/2011

GEO no. 109/2011 was revised and codified by Law no. 111/2016, which introduced important amendments to the legislative framework on corporate governance of SOEs, based on the identified shortcomings and subsequent recommendations of the 2014 report on implementation of GEO no. 109/2011 (Box ‎1.2).

Box ‎1.2. Main provisions of Law no. 111/2016

Ownership arrangements

In the aim of separating ownership from regulatory functions of line ministries, the law required the establishment of corporate governance structures in public authorities with ownership roles. It also attributed a co‑ordination function to the Ministry of Finance, along with sanctioning powers for non-compliance with corporate governance requirements. The Ministry of Finance is also tasked with preparing and publishing annual aggregate reports on the activity of central and local SOEs.

Objective‑setting and performance management framework for SOEs

The law introduced a performance management framework for SOEs, to be designed and implemented through several instruments: (i) letters of expectation to be prepared by the state owner – in collaboration with minority shareholders – for individual SOEs detailing their long-term objectives (i.e. for a period of four years), (ii) declarations of intent to be prepared by SOE board and executive candidates, and (iii) administration plans to be jointly prepared by SOE board members and executive management upon their appointment setting out concrete targets, based on which performance indicators are then required to be developed by line ministries and included in the mandate contracts16 of SOE board and executive members, in line with the provisions of Government Decision no. 722/2016.

Source: Romanian Government (2016[14]), Law no. 111/2016, https://legislatie.just.ro/Public/DetaliiDocumentAfis/178925 and Romanian Government (2016[15]), Government Decision no. 722/2016, https://legislatie.just.ro/Public/DetaliiDocument/182501

At present, all state‑owned enterprises regardless of their legal form are required to observe the provisions of GEO no. 109/201117 (as approved by Law no. 111/2016), with a few exceptions. Two defence and national safety SOEs (CN Romtechnica SA and Rasirom RA) are exempted as well as a maritime enterprise (Damen Shipyards Mangalia SA), whose operational management is entrusted to its minority shareholder in spite of it being majority-owned by the state. Credit institutions (CEC Bank, Eximbank) are also exempted from the provisions of GEO no. 109/2011 (as approved by Law no. 111/2016), on the grounds that they are subject to specific prudential standards applicable to the financial sector.18

Some subsequent attempts were made to amend, and apparently weaken, the provisions of the law. A legislative attempt to amend Law no. 111/2016 to exempt around 100 SOEs (including the largest ones) from corporate governance requirements was made in December 2017 but was deemed unconstitutional in 2018 (European Commission, 2019[16]). In addition, in 2018, the government attempted to set up a Sovereign Development and Investment Fund, to which it intended to transfer the ownership of around 30 SOEs, and to be classified outside the budget perimeter with very broad objectives, including job creation, infrastructure development, innovation and competitiveness. While the creation of the Fund received parliamentary approval in 2018, it was deemed unconstitutional in 2019, and its future remains unclear (European Commission, 2019[16]; 2020[6]).

Although the legal framework for SOEs has been strengthened since 2011 in the aim of professionalising SOE boards and insulating them from political interference, it should be noted that there is at least one important loophole in the law. It allows for interim appointments of board members and management, in order to ensure business continuity. These four-to-six months interim appointments stand in stark contrast with the four‑year mandates allowing for stability, accountability and long-term planning, and have become standard practice in recent years. As such, the provisions of the law have only been marginally observed and implemented since 2016, and SOE board appointments remain highly politicised (see Section 1.4.4 for more information).

Other relevant laws and regulations

The state’s expectations from SOEs can also be found in the following laws and regulations, which are briefly summarised below (Table ‎1.6) and described in more detail in other relevant sections of the review:

Government Ordinance no. 64/2001 (as amended by GO no. 29/2017) on the dividend policy
Government Ordinance no. 26/2013 (approved with amendments by Law no. 47/2014) on strengthening the financial discipline of SOEs in which the state (via central or administrative‑territorial units) is sole or majority shareholder or directly or indirectly holds a majority stake
Law no. 85/2014 on insolvency
Law no. 672/2002 on public internal audit
Law no. 162/2017 on statutory audit of annual financial statements
Order of the Minister of Public Finance no. 666/2015 on the application of IFRS by SOEs
Law no. 98/2016 on public procurement and Law no. 99/2016 on sectoral public procurement
Law no. 544/2001 on access to information of public interest (applicable to any public authorities and institutions, including those managing public financial resources)
Government Decision no. 722/2016 on the methodological norms underpinning the appointment procedure for board members and executive management in SOEs, and with regard to establishing financial and non-financial performance indicators for monitoring the performance of SOEs
Order of the Ministry of Finance no. 1952/2018 on the disclosure requirements of line ministries, as well as those of the Ministry of Finance as part of its monitoring responsibilities.

Law	Main provisions relevant to SOEs
Companies Law no. 31/1990	As the primary legislation for the Romanian corporate sector, it applies to all companies in Romania, and contains provisions regarding the management of the company, the appointment and dismissal of board members and executive management, as well as their responsibility, revocation and liability towards the company.
GEO no. 109/2011 (amended and approved by Law no. 111/2016)	Main law regulating the ownership and corporate governance of SOEs.
GD no. 722/2016	Secondary legislation detailing the provisions of GEO no. 109/2011 regarding the establishment of financial and non-financial indicators for monitoring the performance of SOEs, and remunerating SOE boards and executive management.
Ordinance no. 26/2013 (amended and approved by Law no. 47/2014)	The Ordinance aims at strengthening the financial discipline of SOEs in which the state (via central or administrative‑territorial units) is the sole or majority shareholder, or directly or indirectly holds a majority stake.
Bucharest Stock Exchange (BVB) Code of Corporate Governance	The Bucharest Stock Exchange (BVB) Code of Corporate Governance includes a set of principles and recommendations which can be adopted on a comply-or-explain basis by companies whose securities are traded on the regulated market. It differentiates two tiers of companies – standard and premium – with corporate governance requirements being more stringent on the latter.
Law no. 85/2014 on Insolvency	The law does not provide for any protection from the application of insolvency or bankruptcy procedures based on the legal status of SOEs. The minimum amount of the claim for which the request for opening of the insolvency procedure can be filed is of RON 50 000 both for the creditors and for the debtors.
Law no. 672/2002 on Internal Public Audit	Main legislation regulating the exercise of public internal audit in public entities.
Law no. 98/2016 on Public Procurement and Law no. 99/2016 on Sectoral Public Procurement	Main laws on public procurement transposing the provisions of the EU Directive on procurement (EC 2014/25/EU) into national legislation. These laws regulate the procedures for awarding public procurement contracts, as well as certain aspects related to their execution.
Law no. 162/2017 on Statutory Audit of Annual Financial Statements	The regulation transposes into national legislation the requirements of EU Regulation no. 537/2014 on statutory audit, which is to be performed by financial auditors or by authorised audit firms that are registered as members of the Chamber of Financial Auditors in Romania (CAFR). The law requires inter alia public interest entities to have an audit committee composed of a majority of non-executive and independent members.
Order of the Minister of Public Finance no. 666/2015 on IFRS standards for a number of SOEs	The regulation transposes the requirements of International Financial Reporting Standards (IFRS) into national accounting regulations for 17 SOEs.
Law no. 15/1990 on Reorganization of Economic Entities as Regies Autonomes or Commercial Companies	The law undertook the conversion of the former socialist “state economic enterprises” into (i) commercial companies with share capital, and (ii) (fully-owned) autonomous administrations (“regii autonome”). The latter were to remain state property and operate only in strategic sectors of the economy, such as inter alia the defence industry, rail and urban transportation, energy, natural gas and mining.
Law no. 544/2001 on Access to Information of Public Interest	The law provides that any person has the right to request and obtain information of public interest from any public authority or institution that uses or manages public financial resources (including autonomous administrations and corporatised SOEs operating under the Companies Law).
Order of the Ministry of Finance no. 1952/2018	The Order regulates the procedure for monitoring the implementation of the provisions of GEO no. 109/2011 (as amended and approved by Law no. 111/2016) regarding the corporate governance of SOEs.
GO no. 64/2001 (amended by GO no. 29/2017) on the distribution of profit	Government Ordinance no. 64/2001 on the distribution of profit in national enterprises, national companies and fully or majority state‑owned companies, as well as autonomous administrations, regulates the distribution of a minimum share of 50% transfers from the state or local budget in the case of autonomous administrations, or dividends, in the case of national enterprises, national companies and fully or majority state‑owned companies. Further, Government Ordinance no. 29/2017 stipulates that the government as an owner has the right to receive dividends, including from previous years’ reserves.

Source: Adapted from World bank (2021[17]), Romania: Policies in support of a fiscally sustainable recovery.

1.4. Ownership framework and responsibilities

1.4.1. Ownership arrangements and co‑ordination

Ownership framework

As of 2020, the ownership of the 216 SOEs considered in this report was dispersed across 20 central government institutions (including 14 line ministries and six other central institutions). However, five ministries concentrated the majority of SOEs (166), representing 71% of the central state‑owned sector total value (Figure ‎1.9). In addition, with only eight SOEs in both of their portfolios, the General Secretariat of the Government and the Ministry of Finance respectively owned 16% and 11% of the total value. The remaining 13 central institutions exercising ownership functions each oversaw a portfolio of SOEs representing less than 0.5% of the total value.

Figure ‎1.9. Breakdown of SOEs held by central government, by number and share of total equity value of the central state‑owned sector (in percentage) as of end 2020

The five ministries with the largest number of SOEs in their portfolio as of 2020 included the Ministry of Energy with 19 SOEs accounting for an equity value of USD 8.7 billion or 45% of the state owned sector’s total value, the Ministry of Transport (26 SOEs; USD 3.5 billion; 18% of total), Ministry of Research, Innovation and Digitisation (52 SOEs; USD 754 million; 4% of total), Ministry of Economy (43 SOEs; USD 627 million; 3% of total) and Ministry of Environment, Waters and Forest (26 SOEs; USD 202 million; 1% of total). These portfolios – along with the ones of the Ministry of Finance and General Secretariat of the Government (GSG) – include Romania’s most economically important SOEs. Details of the individual SOEs are provided in Annex A.

Ministry of Transport and Infrastructure

The Ministry of Transport and Infrastructure is responsible for implementing European legislation regarding transport and transport infrastructure. As of end 2020, it exercised ownership over 26 SOEs operating in the naval, air, railway and road transport sectors (Table ‎1.7). The portfolio includes a majority of unlisted fully incorporated companies (including some of strategic interest, such as CNAIR), with only five statutory corporations. These SOEs tend to be fully state‑owned, except for nine companies where minority investors own stakes of between 2%‑40% (in the naval and air transport sectors). While in 2020 transport SOEs accounted for 85% of subsidies allocated from the state budget for both exploitation and investment activities, this portfolio also included the SOEs with the highest outstanding payments among central public enterprises as of end 2020, including CFR, CFR Marfa, CFR Calatori, and TAROM, due to the outbreak of the COVID‑19 pandemic.

Domain	Description of individual SOEs
Naval	Administration of the Navigable Canals (80% state‑owned company) organises and manages the operation of the navigable canals on the Danube, including locks and telecommunications installations. Galati Lower Danube River Administration (fully-owned autonomous administration) is responsible for ensuring minimum navigation depths (through maintenance dredging, coastal and floating signage, construction works and repairs, etc.). Maritime Ports Administration Constanta (80% state‑owned company), Administration of Ports of the Danube River (80% state‑owned company) and Maritime Danube Ports Administration (79.9% state‑owned company) were all established as JSCs and are port authorities, respectively operating in (i) the ports of Constanta, Midia, Mangalia and Tomis, (ii) ports located on upper (fluvial) Danube, and (iii) ports located on the maritime Danube. Administration of the navigable bega canal (fully-owned statutory corporation) is a waterway authority.
Air	Bucharest Airport (80% state‑owned), international airport Timisoara – Traian Vuia (80%), international airport Mihail-Kogălniceanu (60%), Air transport company TAROM (98.7% state‑owned). Civil Aviation Authority and Administration of Air Traffic Services ROMATSA (both fully-owned autonomous administrations).
Railway	CFR Palatul (administration of the CFR Palace building and rental activities), CFR (national railway company), CFR Marfa (freight transport operator), CFR Calatori (passenger services), CFR Irlu (locomotive maintenance and repair), Telecomunicatii CFR (telecom infrastructure), Electrificare CFR (electrification installation of the national railway company CFR), S.A.A.F (railway asset administration company), Filaret (typography and printing activities), Informatica Feroviara (IT services), Metrorex are all fully-state owned companies.
Road	CNAIR (fully owned company) is the road infrastructure administration, and the Romanian Auto Registry is an autonomous administration responsible for the improvement of road safety and the reduction of polluting emissions (including through individual road vehicle approval authenticity certifications and technical checks, pollution tests, etc.).

Note: Rofersped is a subsidiary of CFR Marfa.

Source: Ministry of Transport (2021[18]), Annual report on the activity of SOEs under the authority of the Ministry of Transport 2021, https://www.mt.ro/web14/documente/interes-public/rapoarte/2022/Raportul%20anual%20%c3%8eP%202021.pdf

The total equity value of the central state‑owned sector in the portfolio of the Ministry of Transport is driven by four large enterprises in the air transport and railway sectors, including: Bucharest Airport (USD 986 million in equity, 1 459 employees), CFR Marfa and CFR (with respectively USD 878 million and 562 million in equity, and 4 814 and 23 218 employees), and CNAIR (USD 479 million equity, 6 916 employees). In 2020, three fully state‑owned companies were loss-making, including: Electrificare CFR (‑1.2 million), CFR Irlu (‑29.4 million), and Metrorex (‑85.4 million).

Figure ‎1.10. Equity value of the central state‑owned sector in the Ministry of Transport’s portfolio (in million USD)

Ministry of Energy

The Ministry of Energy exercises ownership rights over enterprises operating in the field of electricity (including production, transport, distribution and supply of electric and thermal energy), minerals (including exploitation, processing, transport and distribution of hydrocarbons), and is responsible for energy efficiency policies and the implementation of the EU Green Deal. Of note, the portfolio includes the top four companies on the electricity market (Hidroelectrica, Nuclearelectrica, Oltenia, OMV Petrom), accounting for three‑quarters of the electricity delivered to the network (with the remainder including over 100 generators, each with a market share of less than 5%). While energy SOEs received around 2% of total subsidies granted to central SOEs from the state budget in 2020, they accounted for the largest share of dividends redistributed to the state budget, with SOEs operating in the electricity production and natural gas extraction sectors accounting for more than 70% of total payments to the state budget in 2020 (Ministry of Finance, 2021[19]).

The total equity value of the central state‑owned sector in the portfolio of the Ministry of Energy is driven by three large enterprises. With USD 3.6 billion in equity and 3 400 employees, Hidroelectrica is the largest majority-owned company (80% of state shareholding) in the portfolio, followed by Romgaz (1.9 billion in equity, 5 673 employees, 70% state shareholding) and Nuclearelectrica (1.8 billion in equity, 2011 employees, 90% state shareholding). The portfolio of majority-owned SOEs includes four listed enterprises (Conpet, Oil Terminal, Nuclearelectrica and Romgaz), 14 unlisted companies, and one statutory corporation (Raten).

The Ministry of Energy’s portfolio also includes three listed, minority-owned SOEs: Petrom (20% state ownership, 8 billion in equity, 9 939 employees), Rompetrol (44.7% state ownership, 336 million equity, 1 119 employees), and Electrica (48% state ownership, 1 021 billion in equity, 120 employees).

Figure ‎1.11. Equity value of the central state‑owned sector in the Ministry of Energy’s portfolio (in million USD)

General Secretariat of the Government

The General Secretariat of the Government (GSG) is subordinated to the Prime Minister. As of end 2020, it exercises ownership rights over eight SOEs categorised as of high economic and social importance, including the Property Administration (RAAPPS), a fully-owned autonomous administrations with 1.3 billion equity and 2073 employees, and two listed energy companies: the technical operator of the natural gas transmission system Transgaz (58% state‑owned with 953 in equity and 4 145 employees), and the electricity transmission system operator Transelectrica (58% state‑owned with 852 million in equity and 2021 employees). Four subsidiaries of Transelectrica constitute the rest of the portfolio: Opcom (power market generator), Smart (transmission grid maintenance services), Formenerg (training activities for personnel in the energy sector), and Teletrans (IT and communications services for electrical transport networks).

Ministry of Finance

The Ministry of Finance exercises ownership over SOEs operating in the financial, credit and insurance sectors, including credit institutions, financial and non-financial institutions and insurance companies. The portfolio comprises eight SOEs, including three credit institutions – CEC Bank (full holding), EximBank (95% state‑owned) and Banca Românească (99% state holding) – which are however exempted from the application of GEO no. 109/2011 (as amended and approved by Law no. 111/2016). The rest of the portfolio is composed of the fully-owned company Imprimeria Nationala (responsible for the issuance and circulation of securities), the fully-owned National Credit Guarantee Fund for Small and Medium Enterprises and its subsidiary the Local Guarantee Fund, the fully-owned Romanian Counter-Guarantee Fund, and the insurance‑reinsurance company Exim Romania (98.6% state holding). As of end 2020, the Ministry of Finance also held a minority stake in Fondul Proprietatea (5.14%).

Ministry of Economy

As of end 2020, the Ministry of Economy exercised ownership over a large number of SOEs operating in the defence industry (accounting for 35% of SOEs in the portfolio), tourism (24%), mineral resources (8%), and “other sectors” such as utilities (34%). In 2020, the portfolio included 16 fully-owned, 29 majority-owned and 11 minority-owned SOEs, including 10 enterprises listed on the Bucharest Stock Exchange and 12 SOEs in insolvency proceedings. While the portfolio accounted for 3% of total value of the central state‑owned sector in 2020, the Ministry of Economy also owned the most loss-making SOEs among central government institutions over the same period (representing an aggregate ‑165 million), including: Damen Shipyards Mangalia (‑65 million in equity), Uzina Mecanica Orastie (‑61 million), Metrom (‑13 million), Avioane Craiova (‑11.8), Certej (‑5 million), Cugir (‑3 million), Minvest (‑2.5 million), and Conversmin (‑675 933). Except for Damen Shipyards Mangalia and Avioane Craiova, these are fully state‑owned.

Rationale for state ownership

Romania adopted an ownership policy in 2016 shortly after Law no. 111/2016 came into force. It aimed to specify the purpose of state ownership and the expectations of the state towards public enterprises as a pre‑requisite to providing individual SOEs with clear objectives, as well as to clarify the roles and responsibilities of all stakeholders involved in the exercise of state ownership. As such, the policy classifies companies into two large categories: the ones for which the state has mainly commercial objectives and which are expected to maximise economic value, and the enterprises with public service and policy objectives. This follows clarifications regarding the rationale for state ownership, which according to the ownership policy should be based on four key pillars: (i) control over natural resources, (ii) managing natural monopolies, (iii) delivering public services, and (iv) strategic business reasons. It should however be noted that the latter is generally vague, as owning SOEs for “strategic business reasons” may include a wide range of economic activities across many sectors, which may potentially be used to justify direct state intervention in any industries where a more solid economic rationale (e.g. market failure or public service requirements) cannot be provided.

Indeed, according to a (2020[8]) World Bank report drawing from data from the OECD Product Market Regulation (PMR) database, it appears that the state is present in some sectors where its intervention seems to not based on sound economic or strategic grounds, including sectors beyond typical network industries (such as manufacturing, shipbuilding and accommodation). According to the report, Romania has at least one SOE in 23 out of the 30 sectors tracked by the OECD PMR indicators, compared to 12 sectors in the Slovak Republic, 17 in the Czech Republic, 18 in Hungary, and 15 on average in the EU‑15 – with SOEs operating in all the 10 network sectors,19 and in at least 13 non-network sectors, including sectors with viable competition and private sector operators, making for a significant SOE footprint (Box ‎1.3).

Even in sectors where the presence of SOEs is usual, unclear economic rationales for state ownership seem to exist. This is the case of TAROM for instance, which remains state‑owned despite the fact that it has been operating at a loss for ten consecutive years. In spite of the liberalisation of railways since 1998, the state also keeps full control – and is liable for losses – of companies operating in the three market segments, including infrastructure operation (CFR), freight services (CFR Marfa) and passenger services (CFR Calatori) (World Bank, 2020[8]). Regarding rail freight, the fact that CFR Marfa received state aid that was later deemed incompatible also raises concerns about the preferential treatment of SOEs in the sector (EC, 2020[20]).

Box ‎1.3. Market positions of SOEs

According to a (2020[8]) World Bank report, Romanian SOEs operate in several sectors because of (i) market failure, natural monopoly and information asymmetries (in such sectors as air and road transport, railroad infrastructure, electricity transmission, generation and supply, and postal services), or in (ii) network industries with economies of scale and scope (in such sectors as electricity supply, gas production, transmission and supply, and telecommunications). However, there are also several sectors where state ownership seems to be underpinned by unclear economic rationales, including accommodation, construction, building and repairing of ships and boats, and manufacture of basic metals. The report also maps out the market shares of Romanian SOEs and the participation of private companies by sector.

	SOE market shares by sector	Private sector active
Sectors in which private companies are active but SOEs have a market share of >50%	Electricity generation (80% SOEs aggregated), railways passenger transport (>80%‑90%), urban transport (100% underground transport, 100% tram, bus, trolley transport in Bucharest), water transport (100% seaport infrastructure and navigable canals), construction (100%), coal mining (>90%)	Yes, in all sectors, except port infrastructure
Sectors in which SOEs have a significant market share without competing with the private sector	Air transport infrastructure (100%), railways infrastructure (100%), electricity transmission (100%) and distribution (100%), gas production (45%) transmission (100%) and supply (to household consumers, 25%), postal services (100%), air safety services (100%), water distribution (100%), aerospace manufacturing (100%), state credit guarantees (100%), lottery gambling (100%), publishing and printing (100%), mining (uranium, 100%), defense industry (production of weapons, 100%)	Almost all sectors are legal monopolies*, except for the gas production and supply sectors where private companies are active
Sectors in which SOEs compete with the private sector without holding significant market shares	Railways freight transport (36%), air transport passengers (18%‑20%), shipbuilding (<15%), financial service activities (7.5% banking, <5% insurance), television and radio broadcasting (20%‑35%)	Yes, in all sectors

Note: *Postal services were a legal monopoly until end 2019.

Source: Adapted from World Bank (2020[8]), Markets and People: Romania Country Economic Memorandum, https://openknowledge.worldbank.org/handle/10986/33236, based on the OECD-World Bank PMR indicators database (https://datacatalog.worldbank.org/search/dataset/0038692)

Ownership arrangements: institutional roles and responsibilities

In spite of an apparently extensive decentralisation of the ownership framework (as outlined above), it can be argued that Romania currently also embodies some element of a’co‑ordination model’ according to OECD classification, with distinct responsibilities attributed to the Ministry of Finance on one hand, and to line ministries on the other hand.

Ownership model	Main characteristics
Centralised model	One government institution carries out the mission as shareholder in all companies and organisations controlled by the state (with or without exceptions). This institution can be either a specialised ownership agency or a designated government ministry. Financial targets, technical and operational issues, and the process of monitoring SOE performance are all conducted by the central body. Board members are appointed in different ways, but essential input comes from central units.
Coordination model	A department with non-trivial powers over SOEs is formally held by other ministries (and institutions). For example, a co‑ordinating department or specialised unit acting in an advisory capacity to shareholding ministries on technical and operational issues, in addition to being responsible for performance monitoring.
Twin track model	Two different government institutions exclusively exercise ownership functions on their respective portfolios of SOEs.
Dual ownership	A small number of ownership agencies, holding companies, privatisation agencies or similar bodies owning portfolios of SOEs separately.
Dispersed ownership	A large number of government ministries or other high-level public institutions exercise ownership rights over SOEs (in the absence of a co‑ordinating agency).

Source: OECD (2021[21]), Ownership and Governance of State‑owned Enterprises: A Compendium of National Practices 2021, https://www.oecd.org/corporate/Ownership-and-Governance-of-State-Owned-Enterprises-A-Compendium-of-National-Practices-2021.pdf

Indeed, Law no. 111/2016 clarified ownership arrangements by attributing a monitoring role to the Ministry of Finance, and by requiring each line ministry and other central government institutions to set up a “corporate governance structure” comprised of competent professionals to exercise the ownership function. This intended to delineate ownership responsibilities from regulatory roles within line ministries, and to prevent potential conflicts of interest that such an overlap might entail. The law also prescribed some degree of co‑ordination regarding the flow of information across institutions (Figure ‎1.12).

Figure ‎1.12. Institutional arrangements as prescribed by Law no. 111/2016

Ministry of Finance

Since 2016, the Ministry of Finance carries out a monitoring role with regard to the financial performance of SOEs, as well as the implementation of corporate governance provisions (prescribed by Law no. 111/2016) by all public enterprises subjected to the law, as well as by their ownership entities. Its monitoring powers are established by Order of the Ministry of Finance no. 1952/2018, with sets out reporting requirements for line ministries using a standardised format (S1100 form). The reporting must include information regarding: (i) the application of the provisions of Law no. 111/2016; (ii) audited annual financial statements of SOEs and the performance status of their key performance indicators (including, if relevant, the causes that led to deviations of more than 10% from the approved targets); and (iii) a list of board members of the SOEs in their portfolios.

While this information is to be transmitted electronically from line ministries to the Ministry of Finance, it can be argued that reporting requirements as currently devised (whereby SOEs are subject to reporting requirements to their line ministries, which are in turn required to transmit information to the Ministry of Finance) can create delays in data collection by the Ministry of Finance, which may in turn hamper its monitoring and oversight capacities.20 Further, not all line ministries comply with reporting requirements: as of end 2021, nine central government institutions had not reported information about 16 SOEs (Ministry of Finance, 2021[19]). For enforcement purposes, the Ministry of Finance also has sanctioning powers in case of non-compliance with corporate governance provisions by both SOEs and line ministries. However, the amounts of these monetary fines appear limited, and may not bear a strong-enough deterrent effect.

Responsibilities of the Ministry of Finance	Responsibilities of line ministries
Monitor and evaluate the application by SOEs and line ministries of the provisions of the law. Develop rules, regulations, guides, forms to facilitate uniform application by line ministries and monitoring the implementation of legal provisions and international best practices in the field of corporate governance. Monitor the financial and non-financial performance indicators of SOEs in co‑operation with line ministries. Establish a database of board members and executive managers of central and local public enterprises by centralising the lists of directors and managers received from ownership entities after publication on their own websites. Prepare and submit to the government an annual report on SOEs, to be published on its website in August of each year reporting on information of the previous fiscal year (from 1 January to 31 December). Together with competent ministries, drawing up implementing rules to approve a uniform framework for (i) establishing selection criteria for executive and non-executive members of SOEs, (ii) drawing up a shortlist of up to five candidates for each post, (iii) determining their ranking, and (iv) the procedure for final appointments. Issue warnings and fines to line ministries and SOEs failing to comply with certain legal requirements.	Oversee the board member selection process. Propose candidates for executive and non-executive positions in compliance with legal requirements regarding qualifications and experience. Appoint state representatives to SOE boards. Establish and monitor performance objectives. Monitor the board of directors directly for autonomous administrations, and through the general meeting of shareholders for commercial companies, to ensure that the SOE is operating under principles of efficiency and profitability. Monitor the implementation of the remuneration guidelines. Monitor conflicts of interest and approve related party transactions. Monitor other corporate governance practices in SOEs.

Responsibilities of the Ministry of Finance

Responsibilities of line ministries

Monitor and evaluate the application by SOEs and line ministries of the provisions of the law.
Develop rules, regulations, guides, forms to facilitate uniform application by line ministries and monitoring the implementation of legal provisions and international best practices in the field of corporate governance.
Monitor the financial and non-financial performance indicators of SOEs in co‑operation with line ministries.
Establish a database of board members and executive managers of central and local public enterprises by centralising the lists of directors and managers received from ownership entities after publication on their own websites.
Prepare and submit to the government an annual report on SOEs, to be published on its website in August of each year reporting on information of the previous fiscal year (from 1 January to 31 December).
Together with competent ministries, drawing up implementing rules to approve a uniform framework for (i) establishing selection criteria for executive and non-executive members of SOEs, (ii) drawing up a shortlist of up to five candidates for each post, (iii) determining their ranking, and (iv) the procedure for final appointments.
Issue warnings and fines to line ministries and SOEs failing to comply with certain legal requirements.

Oversee the board member selection process.
Propose candidates for executive and non-executive positions in compliance with legal requirements regarding qualifications and experience.
Appoint state representatives to SOE boards.
Establish and monitor performance objectives.
Monitor the board of directors directly for autonomous administrations, and through the general meeting of shareholders for commercial companies, to ensure that the SOE is operating under principles of efficiency and profitability.
Monitor the implementation of the remuneration guidelines.
Monitor conflicts of interest and approve related party transactions.
Monitor other corporate governance practices in SOEs.

Overall, the Ministry of Finance is responsible for developing rules, regulations, guides and forms for line ministries in order to facilitate the implementation of corporate governance provisions (prescribed by Law no. 111/2016). Further, the Ministry of Finance is required to publish an annual aggregate report on SOEs, including information on the financial performance and value of the state‑owned sector (i.e. consolidated balance sheet and profit and loss accounts of the SOE sector), total employment in SOEs, and on the application of corporate governance provisions prescribed by Law no. 111/2016 (i.e. compliance with the prescribed board selection process, and with transparency and disclosure requirements).

Line ministries

As mentioned above, Law no. 111/2016 requires each ownership entity (i.e. line ministry) to establish a dedicated corporate governance structure to carry out its responsibilities as the shareholder of SOEs, in order to delineate the ownership function from other conflicting roles of the state with regard to regulating markets and setting industrial policies. However, while it seems that not all central government institutions have established this mandatory structure,21 in some line ministries which retain important regulatory powers (e.g. Ministry of Transport) it is unclear whether this separation is effectively ensured in practice. By law, corporate governance structures are tasked with the following duties:

Overseeing the board member selection process
Proposing candidates for executive and non-executive positions in compliance with legal requirements regarding qualifications and experience
Appointing state representatives to SOE boards22
Establishing and monitoring performance objectives
Monitoring the board of directors directly for autonomous administrations, and through the general meeting of shareholders for commercial companies, to ensure that the SOE is operating under principles of efficiency and profitability
Monitoring the implementation of the remuneration guidelines
Monitoring conflicts of interest and approving related party transactions
Monitoring other corporate governance practices in SOEs.

According to information gathered by the review team, where corporate governance structures are effectively established, there seems to be wide disparities with regard to their composition, which can range from including three civil servants in some ministries (e.g. Ministry of Energy, which oversees a portfolio of large and economically important SOEs), to 16 civil servants in others (e.g. Ministry of Transport). The Ministry of Environment has no such structure for exercising ownership over Romsilva, and the board selection process of Romsilva is overseen by the Human Resources Department of the ministry. In addition to variations in available resources, some line ministries also reportedly lack professionals with specialised skills. While having recourse to relevant trainings on a regular basis could potentially fill those gaps, overall it is important to ensure that these structures are properly staffed and have an adequate budget in order for them to effectively exercise their ownership rights.

Objective‑setting and performance monitoring of SOEs

The objective‑setting and performance management framework for public enterprises is clearly set by law and regulation, including Law no. 111/2016 (amending and approving GEO no. 109/2011) and GD no. 722/2016. However, it remains widely not implemented by ownership entities, due to the fact that it is codified through the board appointment process, which is itself often bypassed.

Legal provisions on the performance management framework for SOEs

A detailed framework for SOE performance management is provided by Law no. 111/2016, as well as Government Decision no. 722/2016. According to Law no. 111/2016, the respective ministries’ corporate governance structures are responsible for setting and monitoring clear performance management objectives for individual SOEs, which are codified through the appointment process for board members and executive management. In particular, as part of the selection and appointment process, corporate governance structures are required to prepare – in consultation with minority shareholders, where relevant – a “letter of expectations” for individual SOEs outlining the performance expected from SOE boards and executive management for a period of at least four years, as well as the policy for SOEs required to deliver specific public services (see Annex C).

Based on this letter of expectations, executive managers are upon appointment required to prepare an administration plan that the board must approve within 90 days. Following this, the board is in turn required to prepare an administration plan of its own within 90 days of its appointment. A consolidated administration plan comprised of these two components – one elaborated by management, the other by the board – is then submitted for approval by the board of directors within a maximum of 20 days from the date of submission. According to the Romanian authorities, these provisions aim to align objectives and ensure realistic expectations from line ministries, corporate governance structures and SOEs’ board and management, as well as overall policy coherence.

Box ‎1.4. Disclosing SOEs’ objectives: letter of expectations and administration plan, as provided by Law no. 111/2016

Letter of expectations

The letter of expectations is a working document through which the line ministry in consultation with any shareholders representing, either individually or together, 5% of the share capital of the state‑owned enterprise, establishes the performance expected from the management and supervisory bodies of the state‑owned enterprise, as well as the policy of the line ministries regarding SOEs which have specific public policy obligations, for a period of at least four years. Each line ministry is required to develop the letter of expectations for individual SOEs, and make it publicly available on its webpage.

Administration plan

The administration plan is a working document of the executive managers and of the board members materialised into a document elaborated to determine the objectives of a state‑owned enterprise during their mandate. It is structured on two components: of administration, elaborated by the board of directors or the supervisory board, and of management, elaborated by the managers or members of the management. It is based on the letter of expectations and establishes the mission, objectives, actions, resources and financial and non-financial performance indicators for the performance of a specific activity for a period of time which cannot exceed four years.

Source: Romanian Government (2016[14]), Law no. 111/2016, https://legislatie.just.ro/Public/DetaliiDocumentAfis/178925

Based on these set objectives, corporate governance structures are expected to use the detailed examples of financial and non-financial KPIs provided by GD no. 722/2016. While Annex 1 of GD no. 722/2016 provides examples of KPIs required to monitor SOE performance, Annex 2 outlines KPIs underpinning the remuneration of SOEs’ executive and non-executive directors. In particular, four categories of KPIs are included in Annex 2 (financial, operational, public service and corporate governance), and their weight is differentiated for non-executive and executive directors (with corporate governance KPIs weighting between 50‑75% for non-executive directors, and financial and operational KPIs weighting between 35‑75% for executive directors). According to Article 35 of Annex 2 of GD no. 722/2016, when setting performance indicators, corporate governance structures may be assisted by independent experts.

Box ‎1.5. Describing the four categories of KPIs detailed in Annex 2 of GD no. 722/2016

Annex 2 provides detailed KPIs, as well as a methodology for determining the variable remuneration component of SOEs’ non-executive and executive directors, which may be adjusted by SOEs and corporate governance structures, as provided by Article 28 of Annex 2.

Financial indicators include outstanding payments, operating expenses, current liquidity, EBITDA, work productivity, etc.

Operational indicators include the achievement of public policies, quality of services/products, coverage of services/products, productivity of assets, customer satisfaction, etc.

Corporate governance indicators include the development of an internal management control system, establishing the risk management policies and risk monitoring.

In particular, the variable remuneration component of executive directors (or executive management in two‑tier boards) should be determined according to the following model:

25‑50% financial KPIs
10‑25% operational KPIs
5‑25% public service oriented KPIs
10‑25% KPIs specific responsibilities for corporate governance.

The variable remuneration component of non-executive directors (or supervisory board members in two‑tier boards) should be determined according to the following model:

5‑20% financial KPIs
5‑20% operational KPIs
5‑25% public service oriented KPIs
50‑75% KPIs specific responsibilities for corporate governance.

Source: Romanian Government (2016[15]), Government Decision no. 722/2016, https://legislatie.just.ro/Public/DetaliiDocument/182501

According to the law, the mandate contract concluded by the company with the board members should include the objectives and financial and non-financial performance indicators established by the general meeting of shareholders, as well as those from the letter of expectations. For SOEs established as companies (JSCs or LLCs), the assessment of the board members’ activity should be made on an annual basis by the general meeting of shareholders, with support from experts as relevant, and should refer both to the execution of the mandate contract and of the administration plan. For SOEs established as autonomous administrations, performance should be assessed by the ownership entity, which can be assisted by independent experts. The degree of compliance with objectives should inform the amount of variable remuneration granted to SOE board and executive members.

Provisions remain widely unapplied due to interim board and executive appointments

While this legal framework can be considered robust in theory, it should be noted that it remains widely not implemented in SOEs. Indeed, an important caveat of this system is that it is intrinsically linked to the appointment process for board members and executive managers, which in practice is often bypassed. In particular, the extensive reliance on interim board and executive appointments entails that at present, only few board and executive mandates are longer than six months (see Section 1.4.4 for details). As such, as of end 2020, KPIs for board members were reportedly set in only 31 centrally-owned SOEs out of the 151 public enterprises subject to Law no. 111/2016, and KPIs for executive managers were set in only 26 central SOEs (Figure ‎1.13).

Figure ‎1.13. Share of central SOEs with established KPIs for board and executive members (in 2020)

At present, for the large majority of SOEs (with interim appointees), objectives are currently set on a quarterly basis, and are restricted to financial objectives mainly including revenue and expense forecasts (which are derived from the approved budget). This stands in stark contrast with the framework envisaged by the law, which provides that SOE objectives and clear financial and non-financial KPIs be set on an annual basis in consultation with minority shareholders and approved by the general shareholders’ meeting. This practice notably limits the operational autonomy of boards.

Even in SOEs where KPIs have been established, some irregularities have been found regarding the manner in which they have been set, as not effectively derived from the objectives set out in the letter of expectations. This is the case for Hidroelectrica, where the Court of Accounts found that the KPIs set for board and executive members in 2020 had not fully transposed the expectations of the state owner. While the letter of expectations emphasised investments (including inter alia the realisation of profitable hydropower investments), the performance indicators listed in the Annex to the mandate contracts of board and executive members seem to be limited to the implementation of renovations and modernisations (with a target value of minimum 55% of the approved reference entry balance for 2020). It should however be noted that Hidroelectrica filed an appeal. Another issue is whether the financial KPIs, where actually established, are actually adhered to. As of end 2020, around 30% of the financial indicators set for SOE board and executive members had not been met (Figure ‎1.13).

Figure ‎1.14. Degree of compliance with financial KPIs set for executive and non-executive directors

1.4.2. Description of selected Romanian SOEs

Hidroelectrica

The company known as Hidroelectrica (full name “Societatea de Producere a Energiei Electrice in Hidrocentrale S.A.”) is majority-owned by the state and not traded in the stock markets. The state, through the Ministry of Energy, holds 80.06% of the shares; the national Property Fund (“Fondul Proprietatea”) owns the rest.

Hidroelectrica’s main areas of commercial activity are electric power generation, transmission and distribution. Based on its extensive network of hydroelectrical power plants, it is the largest power generator in Romania, and at the same time it engages in the distribution and supply of electricity produced by other companies. Its existence as an autonomous company dates back to 2000 when the state‑owned energy conglomerate CONEL, which among other things acted as a holding company for four national electricity generators, was broken up. Hidroelectrica currently employs 3 354 persons.

The company and its owners have taken certain steps to align corporate governance with private sector practices. Hidroelectrica has a two‑tiered board structure, with seven members of the supervisory board and five members of the management board. The work of the supervisory board is supported by three board committees for auditing; nomination and remuneration; and strategy. The board members are appointed for a four‑year period and have been on post since February 2019. The members of the supervisory board include ministerial representatives, employees of other state‑owned or state linked companies, and entirely independent individuals. The president of the board is State Secretary in the Ministry of Energy, and one of the other board members is Director General in the same Ministry.

Hidroelectrica, as can be seen from Table ‎1.11, has been reasonably profitable in recent years with rates of return on equity in the range of 8‑10% which is not far from industry averages. Perhaps reflecting this the state expects the company to contribute significantly to the national fiscal budget, to the extent that the dividend pay-out ratios in recent years have exceeded 100%. In the past, Hidroelectrica’s healthy cash flows have also attracted an excessive and perhaps unwanted interest: in 2012 the company entered into insolvency protection following a period in which it was induced, on the one hand, to enter into electricity supply contracts on unfavourable terms and, on the other hand, purchase energy from other SOEs at a loss to itself.

		2015	2017	2019	2020
Asset value	USD mill.	4 613	4 731	4 058	4 196
Book equity value	USD mill.	4 338	4 501	3 534	3 651
Annual turnover	USD mill.	767	836	974	968
EBITDA	USD mill.	511	601	689	684
Net Profit	USD mill.	217	349	325	366
Dividends	USD mill.	163	460	529	513
Provisions	USD mill.	38	47	186	208
Long-term debt	USD mill.	133	76	219	216
ROA	%	4.7	7.4	8.0	8.7
ROE	%	5.0	7.8	9.2	10.0

Source: Information provided by the Romanian authorities.

As previously mentioned, in March 2022, the initiation of the listing of the shares of Hidroelectrica on the Bucharest Stock Exchange was approved by the shareholders (including the Ministry of Energy with 80.06% of the shares, and Fondul Proprietatea with 19.94% of the shares), with Fondul as the selling shareholders of up to 19.94% of the share held in Hidroelectrica. The listing is aimed to be completed by Q1 2023.

The railway companies

Romania’s railway system is commonly known by the acronym CFR (Romanian – “Caile Ferate Romane”). Its network has a total length of around 10 800 km and is the 23^rd longest in the world. Following liberalisations commencing in 2011, around 15% of the tracks are leased by private operators. The use of these “non-interoperable tracks” is reserved for the operators and not accessible for the state railway company. There are currently 12 private firms offering passenger rail services and 28 private firms offering freight rail services. The state operator remains the sole provider of nation-wide rail transport.

The state‑owned railway service is divided into three separate companies: the CFR Infrastructura (commonly referred to just as CFR), which manages the infrastructure of the network; the CFR Calatori, which is responsible for passenger services; and the CFR Marfa, which is responsible for freight transport. The three SOEs are all unlisted joint stock companies. Their sole shareholder is the state, operating via the Ministry of Transport and Infrastructure. Common to all three companies is that their financial performance has deteriorated significantly since 2015. Further detail is provided below.

The CFR infrastructure management company

The CFR as mentioned earlier operates the railway network and related infrastructure in Romania. It generates its revenues by renting and leasing out capacity to the state’s own railway companies plus increasingly to private competitors. Since its main clients by far remain CFR Calatori and CFR Marfa, its financial performance is closely linked to the operations of those two companies. Reflecting this, CFR’s profitability has sagged in recent years, most noticeably in the crisis year 2020 (Table ‎1.12). CFR is among Romania’s largest corporate employers. To oversee and operate its extensive railway infrastructure, the company currently employs around 23 200 persons.

The CFR has a board consisting of five non-executive board members. It is chaired by an academic from the Polytechnic University of Bucharest with a degree in railway engineering. Among the other board members are two managers from the Ministry of Transport and Infrastructure and a parliamentary staffer.

		2015	2017	2019	2020
Asset value	USD mill.	2 636	3 521	3 453	3 703
Book equity value	USD mill.	412	578	578	562
Annual turnover	USD mill.	256	278	237	236
EBITDA	USD mill.	65	85	21	‑30
Net Profit	USD mill.	26	40	‑6	‑71
Dividends	USD mill.	0	0	0	0
Provisions	USD mill.	146	160	146	197
Long-term debt	USD mill.	167	142	127	118
ROA	%	1.0	1.1	‑0.2	‑1.9
ROE	%	6.4	6.9	‑1.0	‑12.6

Source: Information provided by the Romanian authorities.

CFR Calatori

CFR Calatori was originally the passenger transport division of CFR, but it was given independent legal personality through a reorganisation in 1998. While private rail providers as mentioned above now compete in the market, competition is less steep than in freight transport and CFR Calatori is under less financial strain that its sister company CFR Marfa (see below). However, the company was hard hit by the COVID‑19 related slowdown in travel activity in 2020, and in early 2022, the European Commission authorised the Romanian Government to disburse EUR 44 million to the company in compensation for its losses. The employment in CFR Calatori, which has been relatively constant over time, in 2020 stood at around 12 100.

		2015	2017	2019	2020
Asset value	USD mill.	934	926	743	754
Book equity value	USD mill.	306	330	256	211
Annual turnover	USD mill.	460	508	493	459
EBITDA	USD mill.	116	138	101	114
Net profit	USD mill.	8	‑5	‑38	‑89
Dividends	USD mill.	0	0	0	0
Provisions	USD mill.	66	40	18	23
Long-term debt	USD mill.	0	0	33	29

Source: Information provided by the Romanian authorities.

CFR Calatori has a unitary board consisting of six directors without executive representation. The current board consists entirely of temporary appointments, and it is not clear from the company’s website who holds the position of president.23 Only two of the board members are characterised as being “without political affiliation”, both of whom hold managerial positions within the Ministry of Transport and Infrastructure. Among the other four, two are parliamentary counsellors and one is an employee of CFR Marfa.

CFR Marfa

CFR Marfa was originally the freight division of CFR but was given independent legal personality in 1998. As of 2020, CFR Marfa employed around 4 800 persons, down from 6 500 in 2015. The company is persistently loss-making, having last posted a profit in 2007. In 2013, under pressure from international lenders, the government attempted to sell a majority stake in CFR Marfa through a trade sale to a strategic investor. However, the bids received were deemed unsatisfactory and the company in its entirety remained in state hands. The company was placed under a pre‑insolvency procedure in 2020 after the European Commission ruled in February that year that the facilities granted by the government in the context of the aborted privatisation process had amounted to illegal state aid. CFR Marfa was ordered to reimburse nearly EUR 800 million including interest and penalty. According to press reports, the government is now engaged in renewed efforts to either privatise or dismantle the company.24

		2015	2017	2019	2020
Asset value	USD mill.	288	283	1 215	2 005
Book equity value	USD mill.	98	21	897	878
Annual turnover	USD mill.	187	188	158	130
EBITDA	USD mill.	‑21	‑20	8	‑15
Net Profit	USD mill.	‑38	‑40	‑56	‑84
Dividends	USD mill.	0	0	0	0
Provisions	USD mill.	1	1	1	1
Long-term debt	USD mill.	14	0	33	36

Source: Information provided by the Romanian authorities.

The company has a unitary board consisting of seven directors without executive representation. The current board – which consists entirely of temporary appointments – is chaired by a Director General from the Ministry of Transport and Infrastructure. Of the other six board members, three are employees of the ministry, one is an executive manager in CFR Calatori and two board members are “outsiders” employed by private companies.

Romgaz

The company known as Romgaz (full name: “Societatea Nationala de Gaze Naturale S.A.”) is a majority state‑owned company that is listed both on the Bucharest and London Stock Exchanges. As previously mentioned, the flotation of Romgaz shares in 2013 was the largest ever IPO in Romania’s history. The state currently holds 70.01% of the shares; there are no other major block holders.25

Romgaz is the largest natural gas producer in Romania and one of the largest producers in Eastern Europe. The company is Romania’s main supplier, responsible for producing around 40% of the country’s total natural gas consumption. Romgaz traces its history back to an integrated gas sector company established in the pre‑communist era. In 2000, the company was broken up, with the gas transmission and gas distribution activities split into separate enterprises. Romgaz retained responsibility for exploration and storage of gas. The company is overseen by the Ministry of Energy which exercises the state’s ownership rights. It currently employs 5 673 persons.

In terms of corporate governance, Romgaz is overseen by a unitary board which includes executive and non-executive directors. The current board consists entirely of temporary appointments. The CEO sits on the board, as do two other senior corporate officers – although the latter are not categorised by the company as being parts of the executive.26 Among the four outside directors the president of the board is State Secretary in the Ministry of Energy. One further official from the ministry sits on the board, as does a high-level employee of another state‑owned enterprise. Only one board member is categorised as being independent.

		2015	2017	2019	2020
Asset value	USD mill.	2 665	2 844	2 040	2 450
Market value	USD mill.	2 528	3 100	3 356	2 731
Book equity value	USD mill.	2 337	2 393	1 667	1 953
Annual turnover	USD mill.	977	1 178	1 156	990
EBITDA	USD mill.	552	708	611	472
Net Profit	USD mill.	288	477	246	322
Dividends	USD mill.	251	678	146	174
Provisions	USD mill.	80	122	123	184
Long-term debt	USD mill.	88	0	0	1
ROA	%	10.8	16.8	12.0	13.2
ROE	%	12.3	19.9	14.7	16.5

Source: Information provided by the Romanian authorities.

Romgaz is a profitable company, with rates of return that compare well with industry averages. It carries little debt, hence its book equity is close to its asset value, both of which fluctuate annually in response to changing hydrocarbons prices (Table ‎1.15). In recent years, the company has had a dividend payout ratio close to 50%, which seems consistent with industry practices. However, it bears mentioning that prior to the stock-market listing, the fund managers of the Property Fund (at that time a minority shareholder) threatened legal action against the government which it alleged was trying to use their shareholder superiority to channel money from the company to compensate for a national budget deficit.

1.4.3. Financial oversight in the SOE sector

Budget approval process

According to GO no. 11/2016 (amending GO no. 26/2013), unlisted SOEs are required to submit the income and expenditure budget (as approved by the general shareholders’ meeting) for approval by the government within 45 days from the date of approval of the Annual State Budget Law. According to the Romanian authorities, the government approves these budgets within 45 days from the date of submission. While listed are required to submit the income and expenditure budget for approval by the general shareholders’ meeting within 60 days from the date of approval of the Annual State Budget Law, the budget of these SOEs is not required to be approved by government. According to the Romanian authorities, if SOEs respect these deadlines, the government approval process is swift.

These provisions represent a significant improvement from the previous process prescribed by GO no. 26/2013, whereby SOEs’ budgets were often approved by government with significant delays (of up to one year in some cases). This reportedly hampered the operational autonomy of capital intensive SOEs in particular (such as energy SOEs), as budgets are to be pro-rated until they are approved by government (with allowed monthly spending of 1/12^th of the budget of the previous year) (Box ‎1.6).

Box ‎1.6. Shortcomings of the budget approval process as provided by GO no. 26/2013

According to a 2015 World Bank report, Ordinance no. 26/2013 was adopted in the context of poor financial performance of SOEs that led to high fiscal burden, as a means to control costs and reduce losses. The report found that the ordinance provides for “strict, long and inadequate budgetary processes without differentiating between loss-making SOEs and profitable ones, leading to various inefficiencies and undermining their autonomy”. In particular, the ordinance then prescribed executive management to prepare the annual budget based on strict rules and performance indicators, which was to be approved by the General Assembly and then submitted to the line ministry and the Ministry of Finance, with final approval issued by the entire government (with delays of up to a year).

Source: Frederick, R. (2015[22]), Decision making, roles and responsibilities in Romanian state‑owned energy enterprises.

Reporting and disclosure requirements

All majority-owned SOEs – regardless of their corporate form – are subject to the reporting requirements of GEO no. 109/2011 (as amended and approved by Law no. 111/2016), as well as those provided by the Accounting Law, and Law no. 47/2014 (amending and approving GO no. 26/2013). In particular, all SOEs are required to submit their annual financial statements, and the consolidated statements with the auditor’s report, to the Ministry of Finance and their ownership entities by May of the following year (according to Article 36 of the Accounting Law). For autonomous administrations, according to Article 9 of Law no. 111/2016, SOE boards are required to prepare “monthly reports to the supervisory public authority [regarding] the fulfilment of the financial and non-financial performance indicators, annex to the mandate contract, as well as other data and information of interest to the public supervisory authority, at its request.”

For fully incorporated SOEs, according to Article 55 of GEO no. 109/2011, the board of directors must submit on a semestrial basis a report on the activity of the SOE at the general shareholders’ meeting, which should include information on the performance of the mandate contracts of board members, details on the operational activities and financial performance of the company, as well as the semestrial accounting reports of the company. Further, according to Article 57, the board must also submit information (including statements and reports) relating to the activity of the SOE to the line ministry, Ministry of Finance, and shareholders with more than 5% of ownership on a quarterly basis and whenever requested “in the format and within the deadlines established by orders or circulars of the beneficiaries”.

Of note, while SOEs are required to abide by the financial and non-financial disclosure requirements provided by Law no. 111/2016, the overall degree of compliance is relatively low (Figure 2.4). As of end 2020, more than 30% of SOEs had not published their annual financial statements and half-yearly accounting reports, and almost 40% had not published their annual audit report. As of end 2021, almost half of SOEs (45%) had not published the annual directors’ report. Although some progress was made since 2017 regarding disclosure of board composition and their remuneration, as of end 2021, around one‑third of SOEs had not published the list of directors and their CVs, and almost half (47%) had not disclosed information on the remuneration of executive and non-executive directors. It is also worth noting that almost 40% of SOEs had not published resolutions of the general shareholders’ meeting in 2021, which can negatively impact the right to information of non-state shareholders in particular, hence hampering the principle of equal treatment of all shareholders.

Internal and external audit

Internal audit

All Romanian SOEs are subject to Law no. 672/2002 on internal public audit, which requires internal auditors to independently assess risk management, control and governance process. Internal audit procedures are organised in accordance with the provisions of GEO no. 109/2011, which provides that the internal auditor be subordinated to the audit committee. Law no. 111/2016 (amending and approving GEO no. 109/2011) also requires SOEs to establish an audit committee, which should be composed of three non-executive members and a majority of independent members (i.e. two independent members), out of which at least one must have competencies in the field of accounting and statutory audit. While the widespread practice of interim appointments in SOE boards may give rise to concerns regarding the independence of audit committee members (see Section ‎1.4.4 below for details), according to the Romanian authorities, independence requirements for SOE board audit committees are usually complied with.

Accounting standards

While companies whose securities trade in a regulated market are required to use IFRS standards since 2012, the 16 largest and unlisted majority-owned Romanian SOEs are required to apply IFRS since 2016, in accordance with the provisions of GEO no. 666/2015. As of end 2020, 24 large SOEs had elaborated financial statements in accordance with IFRS, including nine SOEs listed on the stock exchange, and 15 majority-owned and unlisted SOEs. In practice, smaller SOEs prepare financial statements using Romanian accounting standards, in line with EU Directive 34/2014 transposed in national legislation by Order of the Ministry of Finance no. 1802/2014.

External audit

According to Article 34 of the Accounting Law no. 82/1991, the annual financial statements of fully or majority-owned SOEs, as well as those of autonomous administrations, are subject to statutory audit, which should be performed by authorised financial auditors or audit companies, and carried out in accordance with International Audit Standards, EU Regulation no. 537/2014, and Law no. 162/2017. According to articles 47‑48 of GEO no. 109/2011, the audit committee should select the external auditor, who should be appointed by the general meeting of shareholders for companies, and by the board for autonomous administrations, for a period of at least three years.

According to articles 21‑24 and Article 28 of Law no. 94/1992, the Court of Accounts also carries out performance and compliance audits of majority-owned SOEs (with more than 50% of state shareholding), which are planned according to an annual activity programme. Internal audit reports are used to delve deeper into any issues that may be identified internally, and if irregularities are found, a notice is sent to SOE’s management, as well as to the ownership entity, who are required to take measures to address the issues identified according to a set deadline. The auditee can request for an extension of the deadline, pending the submission of a document explaining why the initial deadline cannot be complied with. The auditee can challenge the decision before the court.

1.4.4. Boards of directors

Board structure and composition requirements

According to the Companies Law no. 31/1990, companies can have a one‑tier or two‑tier system, which may be changed by the decision of the general meeting of shareholders. SOEs tend to have one‑tier boards. According to the provisions of GEO no. 109/2011, the board of directors of SOEs should be formed as follows:

Autonomous administrations are administered by a board of directors comprised of three to seven members, including one representative from the Ministry of Finance, one representative from the relevant line ministry, and between one and five independent members (who may not be public servants, or state representatives from the line ministry or other public institution).
Joint-stock companies with one‑tier boards must have a board of directors comprised of between three to seven members and may only include one state representative. In the case of large enterprises with over 50 employees and a turnover of over EUR 7.3 million, the board of directors can also be formed of five to nine members, with a maximum of two seats for state representatives, who must be evaluated by the selection committee and comply with the same standards of professional qualifications imposed on all candidates (according to Article 28 of GEO no. 109/2011). For companies with two‑tier boards, supervisory boards must be composed of between five to nine members, who may not be members of the management board nor employees of the company.
In the case of limited liability companies, the number of board members and the selection procedure thereof, as well as the establishment of certain board committees, are decided by the line ministry through the articles of incorporation of the companies in question.

In addition to the state’s maximum of two seats on SOE boards, the Companies Law no. 31/1990 requires boards to be composed of a majority of non-executive and independent members (Article 138). The constitutive act or the decision of the General Assembly may also establish specific conditions of professionalism and independence for supervisory board members. One‑tier boards may include executive directors, and in Romania’s SOEs the CEO often serves on the board. The nomination of independent board members should take into account the criteria set by law (Box ‎1.7). However, according to data provided by the Romanian authorities, at present these requirements are rarely implemented in practice (as described below).

Box ‎1.7. Independence requirements for board members

The nomination of independent board members should take into account the following criteria:

a) that he/she is not a manager of the enterprise or of a company controlled by it and he/she has not held such a position in the last five years

b) that he/she is not an employee of the enterprise or of a company controlled by it and he/she has not had such a work relationship in the last five years

c) he/she should not receive or have received from the enterprise or from a company controlled by it an additional remuneration or other advantages, other than those corresponding to his/her capacity of non-executive administrator

d) he/she should not be a significant shareholder of the enterprise

e) he/she should not have or have had in the last year business relationships with the enterprise, or a company controlled by it, either personally, or as shareholder, administrator, director or employee of a company which has such relationships with the company if, due to their significant nature, they could affect his/her objectivity

f) he/she should not be or have been in the last three years a financial auditor or an employed shareholder of the current financial auditor of the enterprise or of a company controlled by the enterprise

g) he/she should not be a director in another company where a director of the enterprise is non-executive administrator

h) he/she should not have been a non-executive director of the company for more than three mandates (i.e. 12 years)

i) he/she should not have family relationships with a person who is in one of the situations provided under letter a) and d).

It should however be noted that according to Law no. 161/2003, the government may also approve – on an “exceptional basis” – the appointment of politicians (such as secretaries of state and undersecretaries of state) to the board of autonomous administrations, fully incorporated companies and listed companies, including banks or credit institutions, insurance and financial companies “of strategic interest or if a public interest imposes it” [Article 84 (3)]. Private persons may also not simultaneously serve on the boards of more than three companies.

As mentioned above, the board is required to establish two board committees – an audit committee, and a nomination and remuneration committee – and follow specific requirements regarding their composition (as per GEO no. 109/2011). The audit committee must be comprised of a majority of non-executive and independent members, out of which at least one must have competencies in the field of accounting and statutory audit. The nomination and remuneration committee must be composed of non-executive members, out of which at least one must be independent. Other committees may be established at the discretion of the board, with duties and responsibilities established by statute or internal regulation (as per Article 34).

Board nomination process

The selection process for SOE board members is clearly defined and regulated by Law no. 111/2016 (amending and approving GEO no. 109/2011) and the methodological rules set in GD no. 722/2016. According to applicable provisions, selection criteria for individual board vacancies should be established by line ministries, together with the board nomination committee (and independent human resources experts if applicable), taking into account the general criteria provided by law, the requirements set in the letters of expectations, as well as the specificities and complexities of the company’s activities.

In particular, Article 28 of GD no. 722/2016 provides that a ‘board profile matrix’ be established by the board nomination committee, together with the line ministry, which must include the following information: specific selection criteria; evaluation grids for all criteria; weights for each criterion (depending on their importance); the grouping of criteria for comparative analysis; a collective minimum threshold for each criterion (if applicable); subtotals, totals, weighted totals of all criteria for individual board members. This aims to ensure for a transparent, standardised and competitive selection process.

Box ‎1.8. Board selection criteria provided by Government Decision no. 722/2016 (Article 33 of Annex 1)

The Board Profile Matrix distinguishes between mandatory and optional criteria required for a given competency-based board, which have been identified by the analysis of contextual requirements. The mandatory criteria are competencies and traits which must be met by all candidates or board members and for which there is a minimum level of competence required. The optional criteria are competencies and features that may be met by some but not necessarily all of the board members, and for which there is no minimum level of competence applicable to all board members.

The criteria to be used in the selection procedure are differentiated into three groups:

Competencies, including: sector-specific skills; professional skills of strategic importance; corporate governance skills; social and personal skills; local and international experience; specific competencies and restrictions for civil servants or other categories of staff within the line ministry or other public authorities or institutions.
Personality traits, including: personal and professional reputation; integrity; independence; political exposure; interpersonal communication skills; alignment with the shareholders’ letter of expectations; meeting gender diversity criteria.
Other parameters that may be decisive, including: the economic and financial results of the enterprises in which the candidate had exercised his/her mandate as board member or executive manager; the fiscal and judicial records of the candidate; other criteria, depending on the particular SOE and the applicable legal provisions.

Source: Romanian Government (2016[15]), Government Decision no. 722/2016, https://legislatie.just.ro/Public/DetaliiDocument/182501

Importantly, the selection process as regulated by law prescribes the involvement of independent human resources specialists, which is mandatory for large SOEs, and optional for other companies. It should also be noted that in the case of fully incorporated companies, while the state is entitled to propose candidates for board nomination, these proposals should be made on the basis of a prior selection by independent experts. Further, as part of the selection process, shortlisted candidates are required to prepare a “declaration of intent” based on the objectives established in the letters of expectations, which should set out the candidate’s assessment of the medium-term objectives to be achieved, development needs of the SOE regarding corporate governance, and the candidate’s vision of the expectations of shareholders. While board members of autonomous administrations are appointed by the line ministry (based on the proposal of the independent expert when applicable), the law provides that board members of fully incorporated companies be appointed by the general meeting of shareholders among the shortlisted candidates.

Of note, shareholders owning (individually or collectively) at least 5% of the SOE’s share capital may request the application of the cumulative voting method by written proposal within 15 days as of the date of publication in the Official Gazette of Romania of the convening notice of the general meeting of shareholders which has on its agenda the election of the board members. If the request is made by a shareholder holding more than 10% of the SOE’s share capital, the application of the cumulative vote method is mandatory. The cumulative voting method allows shareholders to cast all of their votes for one or more shortlisted candidate(s).

SOE type	Call for applications	Selection process	Nomination process
Autonomous administrations	The vacancy announcement must be published in at least two newspapers and the SOE website	Committee set up by the line ministry, of independent experts for large enterprises (>500 employees)	Line ministry (based on the proposal of independent experts for large enterprises)
Companies		Board nomination committee, which may be assisted by independent experts	General meeting of shareholders; possibility of applying the cumulative voting method at the request of minority shareholders
Large companies		Human resources recruitment companies or independent recruitment specialists

In spite of these provisions seeking to ensure for a transparent selection process, a loophole in Law no. 111/2016 currently allows for interim appointments of board members and executive management (similar to the provisions introduced by Article 137 of the Companies Law no. 31/1990). These interim appointments in SOEs can be directly proposed by the state and should serve for a period not exceeding six months (Box ‎1.9). While this provision intended to create a transitory arrangement at the time of the promulgation of the law, and a stop-gap in case a board is hit by sudden resignations, many ownership entities continue to avail themselves of this provision to appoint directors without proper procedure.

Box ‎1.9. Interim appointments, as provided by Law no. 111/2016

In case of one or more vacant board seats and in order to ensure business continuity, line ministries may appoint interim board members until the selection procedure is completed (in the case of autonomous administrations) or may convene a general meeting of shareholders in order to appoint one or more board member(s) until the selection procedure is completed (in the case of companies). In such cases, the state is entitled to submit proposals for candidates in the general meeting of shareholders.

The duration of the mandate of the interim board member is of four months, with possibility of extension for “solid reasons” for an additional two months, reaching a total period of maximum six months. If the selection procedure is suspended or cancelled by the court of law, the mandate of the interim director continues until the new board member is appointed according to due process. In practice, this continuation is not subject to time limitations and may extend well beyond the six months otherwise foreseen by the law.

Similarly, in case of vacancy of one or more executive management position(s), Article 137 of the Companies Law no. 31/1990 entitles the board to appoint an interim executive manager until the general shareholders’ meeting, only if the articles of incorporation do not provide otherwise. Law no. 111/2016 further provides that this interim mandate may last four months, with a possibility of extension of two months (which may extend well beyond this time period in practice).

At present, the practice of interim appointments is widespread. According to data provided by the Romanian authorities, in 2021, out of the 271 board positions across the 50 largest SOE (in equity value and number of employees), 194 board members were temporary appointments, while only 76 appointments were definitive, following due process. As for executive management, 48 were temporary appointments and 31 were definitive (Figure ‎1.15). This practice has direct consequences on the operational autonomy of boards, which is de facto limited (see section below).

Figure ‎1.15. Status of board and executive appointments in the 50 largest SOEs in 2021

According to data provided by the Romanian authorities regarding the composition of the boards of ten large SOEs, as of end 2021, out of six board positions on average, less than two board members were independent on average.27 However, according to evidence gathered by the OECD review team, it appears that some of these board members classified as independent were in fact politically appointed – and politically connected – in addition to those members appointed on an interim basis.28 It should also be noted that an unusually high number (by international standards) of members of parliament currently sit on the boards of the largest SOEs – which signals that the largest and most economically important enterprises remain controlled by both the governing and opposition parties in Romania. Controversies also exist with regard to the appointment of executive directors, who in some cases are categorised as independent despite evidence of the contrary.29 Overall, this raises concerns around the ability of the board to exercise objective and independent judgment for the long-term interest of the company.

Although the degree of compliance with prescribed provisions seems to have increased from year to year since 2017, in many cases the process is often stalled shortly after it is initiated. For instance, in 2020, while the procedure for selecting board members was initiated in 92 SOEs, it was completed in only 31 SOEs (Ministry of Finance, 2021[19]). According to the Romanian authorities, this is reportedly due to the lack of interested candidates, which may in turn be due to the perception that SOEs remain politically controlled. Indeed, evidence gathered by the review team suggests that although enthusiasm from private sector candidates emerged in the immediate aftermath of the adoption of GEO no. 109/2011 (evidenced by the then large number of private sector applicants), such enthusiasm from professional candidates seems to have declined shortly after, and to have stalled since 2016. This is reportedly due to some high‑profile cases of disbandment by the state of the board of some large SOEs – often without justification – shortly after their nomination according to due process. The most publicised cases where the boards appointed according to legal provisions were subsequently revoked by decision of the General Assembly include CFR Marfa, CFR Calatori, CFR, Posta Romana, and TAROM (Box ‎1.10).

Box ‎1.10. Case of TAROM: board selection and disbandment between 2012‑14

TAROM was the first company to implement the provisions of GEO no. 109/2011 by appointing a new board of directors according to due process in October 2012. The structure of the board was diversified, including people from the banking environment, pilots, businessmen from the private sector, but also people close to the political environment.

The only foreign member of the board was selected as CEO but, for unknown reasons, he refused to sign the contract that was proposed to him. A month later, the board appointed a new CEO, a former director of the national airline company from Luxembourg.

A conflict among the members of the board of directors on different topics led to the resignation of some members. In several interviews and articles, a former member of the board of directors described instances in which the board influenced management decisions and pressured the CEO to resign. In the following two years, the board structure changed four times.

In May 2013, the company’s CEO was forced by the board to accept the reduction of his management contract from four years to one year. Open conflicts between the CEO and chair of the board were related in the press.

In November 2013, the general shareholders’ meeting of TAROM dismissed the entire board and appointed a new interim board of directors.

In May 2014, four of the members of the board of directors were fired, with another resigning a month before.

In June 2014, the entire board was dismissed.

Source: Ministry of Finance (2014[13]), Evaluation of the implementation of the emergency ordinance no. 109/2011, https://mfinante.gov.ro/domenii/guvernanta/rapoarte-generale-periodice

Overall, the practice of interim appointments has drawn criticisms from minority investors in large SOEs. For instance, Fondul Proprietatea has recently raised concerns around temporary board and executive appointees in large SOEs in which it owns a minority stake, which are reportedly exclusively based on political affiliations and lacking relevant professional experience in the field of activities of these companies. These include the board and executive members of Oltenia Energy Complex, Salrom, Bucharest Airports, Timisoara Airport, Galati Ports Company, Constanta Maritime Ports, River Danube Ports Administration, and Plafar.30

Board duties and responsibilities

According to applicable provisions, SOE boards, as well as individual board members, are subject to the same responsibilities and liabilities as is the case for private companies. This applies equally to both corporatised SOEs and autonomous administrations. In majority state-owned SOEs, the same duties should consequently apply equally to board members nominated by the state and those nominated by other shareholders. The duties of the board are established by the Companies Law no. 31/1990, GEO no. 109/2011 (as amended and approved by Law no. 111/2016), the capital markets legislation (for traded companies), and the companies’ articles of incorporation. They are differentiated for one‑tier and two‑tier board structures (Table ‎1.17). According to the provisions of GEO no. 109/2011, the chair of the board cannot at the same time serve as the company’s CEO.31

Responsibilities of the board (with a one‑tier structure)	Responsibilities of the supervisory board (in a two‑tier structure)
Establish the main lines of activity and development of the company; establish the accounting policies and the financial control system, as well as the approval of the financial planning Appoint and revoke executive management, and set their remuneration supervise the activity of executive management Prepare the annual report, organise the general meeting of shareholders and implement the decisions thereof File the request for opening the insolvency procedure for the company.	Exercise permanent control over how the company is managed by executive management Appoint and revoke executive management Verify compliance with the law, with the articles of incorporation and with the decisions of the general meeting of the operations of company management Report at least once a year to the general meeting of shareholders with respect to the supervisory activity it has performed.

Responsibilities of the board (with a one‑tier structure)

Responsibilities of the supervisory board (in a two‑tier structure)

Establish the main lines of activity and development of the company; establish the accounting policies and the financial control system, as well as the approval of the financial planning
Appoint and revoke executive management, and set their remuneration
supervise the activity of executive management
Prepare the annual report, organise the general meeting of shareholders and implement the decisions thereof
File the request for opening the insolvency procedure for the company.

Exercise permanent control over how the company is managed by executive management
Appoint and revoke executive management
Verify compliance with the law, with the articles of incorporation and with the decisions of the general meeting of the operations of company management
Report at least once a year to the general meeting of shareholders with respect to the supervisory activity it has performed.

According to applicable provisions, the members of the boards are all responsible for the fulfilment of their obligations towards the company. The board of directors represents the company in relation to third parties and in court. In the absence of contrary provisions in the articles of incorporation, the board of directors represents the company through the chair. While the chair of the board ensures the communication between the line ministry and the board of directors, this could give rise to concerns in cases where board chairs are appointed on a temporary basis.

As in many other jurisdictions, the board is required to prepare an annual “directors’ report” presenting the development and performance of the company’s activities during the fiscal year and describe the main risks and uncertainties that it is facing. The report should be signed by the chair, and should accompany the financial statements of the SOE. While this report is required to be published on the websites of SOEs, in practice only around half of SOEs do. Boards are also required to establish a conflicts of interest policy, accompanied by an implementation strategy. In this aim, within 90 days of appointment, the board should adopt a code of ethics made publicly available on the SOE website, which should be approved by the internal auditor and revised on an annual basis. However, this code of ethics is not published by around 40% of SOEs on average, which raises concerns around whether such codes are actually adopted.

According to Article 4 of GEO no. 109/2011, the ownership entity and the Ministry of Finance may not intervene in the activity of management and board function of the public enterprise. According to the law, the authority for taking administration and management decisions for the public enterprise and the liability under the law belongs to the board of directors and executive management. However, in spite of these provisions, concerns around excessive political intervention exist in light of the widespread practice of interim appointments.

Overall, in actual practice, the operational autonomy of boards is often limited due to the widely used practice of interim appointments. This entails that in practice, strategic decisions are taken by ownership entities or SOE management, with boards at best focusing on compliance checks and other purely supervisory functions rather than strategic business decisions. In addition, boards are often convened several times per month to either grant authorisation for management to perform certain actions, or to convey requirements from the ownership entity (Romanian Government, 2016[23]). This suggests that many SOE boards have limited independence, operational autonomy and decision-making powers.

1.5. Prospective changes

EU Recovery and Resilience Plan

As described in previous sections, important reforms of the legal framework for SOEs occurred under Romania’s commitments under the IMF – World Bank – EC Economy Recovery Programme, initiated in the aftermath of the 2008 global financial crisis. Going ahead, commitments to international organisations are likely to remain important drivers of reform. Romania has been invited by the OECD to open negotiations with a view to future membership of the Organisation. While the process may necessitate reform in some areas of its SOE landscape, this is envisaged as a medium-term priority that has not yet taken concrete form. In the near term, Romania’s overriding commitment to SOE reform arises from the Recovery and Resilience Plan that the country agreed with the European Commission in 2021 (European Commission, 2021[10]).

Component 14 of the EU Recovery and Resilience Plan focuses on reform and investment to ensure good governance, including concrete priorities for work toward SOE reform. In particular, the so-called Reform 9 puts forward a commitment to “improve the procedural framework for the implementation of corporate governance principles in state‑owned enterprises”. The stated objective of this reform is to improve the corporate governance of all state‑owned enterprises in Romania by enforcing OECD standards.

The reform shall be implemented through the entry into force of amendments to Law no. 111/2016, removing all exceptions to compliance with corporate governance standards, including for state‑owned companies at local level. These amendments shall enforce a separation between the regulatory and ownership functions, remove any direct or indirect advantage that might derive from state ownership, be it in terms of market rules/regulations, financing, taxation, or public procurement, and ensure that any state‑owned enterprise pursue obtaining profitability.

The reform shall also set up and operationalise a task force at the centre of the government to ensure the monitoring of the application of corporate governance standards, having the ultimate responsibility of ensuring a transparent and competitive selection procedure for approving the appointment of board members, and for evaluation and controls. The task force shall publish regular reporting of performance indicators and enforces sanctions for state-owned enterprises non-compliant with key performance indicators. It is unclear at this point what concrete form the task force should take. Based on the terms of the Plan, it could be equivalent to an ownership co‑ordination entity such as those seen in a growing number of post-transition economies, or it could take the form of a central ownership agency with more extensive powers.

A Monitoring Dashboard – essentially equivalent to aggregate reporting in real time – with financial and non-financial targets and performance indicators for all categories of public companies (including key sectors such as transport, energy, public utilities) shall be developed, yearly published and used centrally for reporting and monitoring progress in achieving performance for all categories of state‑owned enterprises.

The implementation of the reform – which will be accompanied by extensive technical assistance provided to the Romanian authorities – will be completed by 30 June 2026. Among the most urgent priorities, the updated legislation for state‑owned companies and the permanent task force to ensure the monitoring and enforcement of the application of corporate governance standards shall enter into force and be operational by 31 December 2022. The Monitoring Dashboard shall be operational by 30 June 2023. An outline of the detailed plan and timeline is provided in Table ‎1.18.

Activity	Description of activity	Completion date
Entry into force of updated legislation for state‑owned enterprises	Entry into force of the amended Law no. 111/2016, removing all exceptions, including for state‑owned companies at local level. These amendments shall (i) separate the regulatory and ownership functions; (ii) remove any direct or indirect advantage that might derive from state ownership, be it in terms of market rules/regulations, financing, taxation, or public procurement; and (iii) ensure that any state‑owned enterprise pursue obtaining profitability.	2022: Q4
Operationalisation of the task force	On the basis of the recommendations of an independent expert panel, a permanent task force is established in compliance with OECD corporate governance standards, and becomes operational to ensure the monitoring of the application of corporate governance standards, has the ultimate responsibility of ensuring a transparent and competitive selection procedure for approving the appointment of administration board members, monitors, evaluates, controls, and publishes regular reporting of performance indicators and enforces sanctions for state‑owned enterprises non-compliant with key performance indicators.	2022: Q4
Publication of the Monitoring Dashboard with financial and non-financial targets and performance indicators for all categories of public companies	A Monitoring Dashboard shall be developed, yearly published and used centrally for reporting and monitoring progress in achieving performance indicators (financial and non-financial) for all categories of SOEs. For this, the following steps shall be performed: (i) conduct an evaluation of all state‑owned companies with recommendations for selling or listing the assets of state‑owned companies; (ii) identify financial and non-financial key performance indicators for monitoring financial and non-financial objectives for all categories of SOEs (including those in sectors such as energy transport, public utilities); and (iii) develop a scorecard for monitoring the application of corporate governance requirements by all SOEs.	2023: Q2
Reduction of interim/temporary management board appointments by 50% for state‑owned companies at central level	The reduction of temporary appointments to the management of state‑owned companies at central level shall be calculated by reference to the baseline level (2020) to be determined in the analysis carried out in 2022.	2023: Q4
Central state‑owned companies listed, leased or restructured in the field of energy and transport	At least three central state‑owned companies listed/leased/restructured in the field of energy and transport, in addition to the listing of at least 15% shares of Hidroelectrica.	2026: Q2
Reduction of interim/temporary management board appointments by 10% for state‑owned companies at local level	The reduction of temporary appointments to the management of state‑owned companies at local level shall be calculated by reference to the baseline level (2020) to be determined in the analysis carried out in 2022.	2023: Q4

Source: European Commission (2021[10]), Proposal for a Council Implementing Decision on the approval of the assessment of the recovery and resilience plan for Romania, https://gov.ro/fisiere/stiri_fisiere/Annex_to_the__Proposal_for_a_Council_Implementig_Decision.pdf.

References

[24] BVB (2020), Shareholding structure as of December 31, 2020, https://www.bvb.ro/FinancialInstruments/SelectedData/NewsItem/BVB-Structura-actionariat-la-data-de-31-decembrie-2020/F9B4E.

[11] BVB (2015), Compendium of corporate governance practices, https://www.bvb.ro/info/Rapoarte/Diverse/EN_EBRD__BVB_Compendium_18.09.2015_note%206.01.2017.pdf.

[12] BVB (2015), Manual for Reporting Corporate Governance, https://www.bvb.ro/info/Rapoarte/Diverse/EN_EBRD__Manual%20for%20reporting_CG_18.09.2015_note%206.01.2017.pdf.

[20] EC (2020), State aid: Romania needs to recover €570 million of incompatible aid from the rail freight operator CFR Marfa, https://ec.europa.eu/commission/presscorner/detail/en/ip_20_313.

[10] European Commission (2021), Proposal for a Council Implementing Decision on the approval of the assessment of the recovery and resilience plan for Romania, https://gov.ro/fisiere/stiri_fisiere/Annex_to_the__Proposal_for_a_Council_Implementig_Decision.pdf.

[6] European Commission (2020), European Semester Country Report Romania 2020, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020SC0522&from=EN.

[16] European Commission (2019), European Semester Country Report Romania 2019, https://ec.europa.eu/info/sites/default/files/file_import/2019-european-semester-country-report-romania_en.pdf.

[22] Frederick, R. (2015), Decision making, roles and responsibilities in Romanian state-owned energy enterprises.

[26] IMF (2017), Romania: Staff Concluding Statement of the 2017 Article IV Mission, https://www.imf.org/en/News/Articles/2017/03/17/ms031717-romania-staff-concluding-statement-of-the-2017-article-iv-mission.

[9] IMF (2014), Memorandum of Economic and Financial Policies, https://www.imf.org/External/NP/LOI/2014/ROU/030514.pdf.

[19] Ministry of Finance (2021), Annual report on SOEs 2020, https://mfinante.gov.ro/documents/35673/220982/raportanual2020.pdf.

[13] Ministry of Finance (2014), Evaluation of the implementation of the emergency ordinance no. 109/2011, https://mfinante.gov.ro/domenii/guvernanta/rapoarte-generale-periodice.

[18] Ministry of Transport (2021), Annual report on the activity of SOEs under the authority of the Ministry of Transport 2021, https://www.mt.ro/web14/documente/interes-public/rapoarte/2022/Raportul%20anual%20%c3%8eP%202021.pdf.

[4] OECD (2022), OECD Capital Market Review of Romania 2022: Developing a Capital Market Strategy for Growth in Romania, OECD Capital Market Series.

[1] OECD (2022), OECD Economic Surveys: Romania 2022, OECD Publishing, Paris, https://doi.org/10.1787/e2174606-en.

[21] OECD (2021), Ownership and Governance of State-owned Enterprises: A Compendium of National Practices 2021, https://www.oecd.org/corporate/Ownership-and-Governance-of-State-Owned-Enterprises-A-Compendium-of-National-Practices-2021.pdf.

[5] OECD (2017), The Size and Sectoral Distribution of State-Owned Enterprises, OECD Publishing, Paris, https://doi.org/10.1787/9789264280663-en.

[25] OECD (2001), Report on Corporate Governance in Romania, https://www.oecd.org/corporate/ca/corporategovernanceprinciples/2390703.pdf.

[7] Romanian Fiscal Council (2022), Analysis of the economic and financial performance of Romania’s state-owned companies in 2020, http://www.fiscalcouncil.ro/SOE%202020%20EN.pdf.

[15] Romanian Government (2016), Government Decision no. 722/2016, https://legislatie.just.ro/Public/DetaliiDocument/182501.

[14] Romanian Government (2016), Law no. 111/2016, https://legislatie.just.ro/Public/DetaliiDocumentAfis/178925.

[23] Romanian Government (2016), Romanian State Ownership Policy, https://www.gov.ro/ro/guvernul/sedinte-guvern/memorandum-cu-tema-participarea-statului-in-economie-orientari-privind-administrarea-participatiilor-statului-in-intreprinderi-publice-rolul-si-a-teptarile-statului-ca-proprietar.

[3] Transparency International (2021), Corruption Perceptions Index, https://www.transparency.org/en/cpi/2021.

[17] World Bank (2021), Romania: Policies in support of a fiscally sustainable recovery.

[8] World Bank (2020), Markets and People : Romania Country Economic Memorandum, https://openknowledge.worldbank.org/handle/10986/33236.

[2] World Economic Forum (2019), The Global Competitiveness Report, https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf.

Notes

← 1. In addition, the capital city Bucharest holds both municipality and county competences.

← 2. The Alliance has since dissolved. One of its main legacy parliamentary parties is the Save Romania Union Party (USR).

← 3. Shareholding structure as of 31 December 2020, The Bucharest Stock Exchange website (2020[24]), retrieved in January 2021: https://www.bvb.ro/FinancialInstruments/SelectedData/NewsItem/BVB-Structura-actionariat-la-data-de-31-decembrie-2020/F9B4E

← 4. SOEs are hereby defined as companies with at least 50% state ownership.

← 5. The OECD review team understands that these institutions are essentially a legacy of the earlier communist economic system, in which products and technologies were often developed by specialised institutes and subsequently produced by manufacturing firms not directly linked with them.

← 6. A definitional point is also at play: according to OECD practices the value of a corporation is the market value if the firm is traded in stock markets, and the book equity value if it is not. In practice, the market value of most profitable companies tends to exceed their book equity.

← 7. This metric is preferred by the OECD on the grounds that it avoids introducing a bias in the case of countries with particularly large self-employment e.g. in the agricultural sector.

← 8. This was based on the government’s findings that “ the reserves established as a self-financing source from the undistributed profit for compulsory destinations [were] not used by companies where the state holds a majority stake, [as] the surplus is reflected in their liquid assets”.

← 9. However, it should be noted that capital intensive SOEs with investment needs can provide justifications to distribute only 50% of their net profit as dividends.

← 10. The CEC Bank also displays mostly sound RoEs. However, this is a highly leveraged financial institution and for comparison its rates of return on assets have been close to zero for the period under review.

← 11. The Companies Law was amended and supplemented by the following enactments: Law no. 302/2005, Law no. 164/2006, Law no. 441/2006, Law no. 85/2006, Government Emergency Ordinance no. 82/2007, Government Emergency Ordinance no. 52/2008, Law no. 88/2009, Government Emergency Ordinance no. 43/2010, Government Emergency Ordinance no. 54/2010, Government Emergency Ordinance no. 90/2010, Law no. 202/2010, Government Emergency Ordinance no. 37/2011, Law no. 71/2011, Government Emergency Ordinance no. 2/2012, Government Emergency Ordinance no. 47/2012, Law no. 76/2012, Law no. 255/2013, Law no. 187/2012, Law no. 152/2015, Law no. 163/2018, and Law 223/2020. The last amendment from 5 November 2020 drastically simplified the transfer of shares in limited liability companies to third parties.

← 12. Following the recommendations comprised in the OECD’s “Report on Corporate Governance in Romania” (OECD, 2001[25]).

← 13. “Public enterprises” include i) autonomous administrations incorporated by the state or an administrative‑territorial unit/companies as well as ii) national companies in which the state or an administrative‑territorial unit is a sole shareholder, a majority shareholder or where it holds control/companies in which one or several public enterprises described hold a majority share or a share that ensures them control.

← 14. For areas not covered by GEO no. 109/2011, the ordinance shall be supplemented by the provisions of Law no. 15/1990, Companies Law no. 31/1990 and Law no. 287/2009 on the Civil Code.

← 15. According to a 2014 report from the Ministry on Finance evaluating the implementation of GEO no. 109/2011, gradual stages of implementation were foreseen. Given that directors and managers usually have a four‑year term, Article 60 of GEO no. 109/2011 provided that the full renewal of all SOE boards and managers be completed by end‑2015. However, Article 61 introduced an exception to this gradual approach and provided that for each large SOE (with a turnover of over RON 1 million and over 1 000 employees), the procedures for appointing new board members and executive managers should start immediately. Each ministry and state agency with SOEs in their portfolio was required to prepare a list of companies that fell into this category. These lists changed several times (Ministry of Finance, 2014[13]).

← 16. According to the Romanian Civil Code, a mandate is a contract whereby one party (trustee) is obliged to conclude one or more legal acts on behalf of the other party (principal). The trustee may not exceed the limits set by the mandate. In the case of SOEs, GEO no. 109/2011 states that the mandate contract will contain clauses regarding how the variable remuneration component will be determined by reference to the agreed-upon financial and non-financial performance indicators.

← 17. This includes joint stock companies (JSCs), limited liability companies (LLCs), and autonomous administrations, but excludes national research and development institutes.

← 18. This follows a declaration from the International Monetary Fund (IMF) dated 17 March 2017, which mentioned that “[b]anks should be excluded from the scope of [GEO no. 109/2011], because they are already subject to a special corporate governance law” (IMF, 2017[26]).

← 19. Including electricity, gas, postal services, railways, air, water, road and urban transport, heating, and telecommunications.

← 20. Reform commitments under the RRP may be a good step towards improvement., in particular the development of a “monitoring dashboard whereby financial performance would be monitored in real time (see Chapter 5 for details).

← 21. In 2020, out of the 16 central institutions with a state ownership role, 14 reported having established this dedicated corporate governance structure.

← 22. The Ministry of Finance is not involved in the board selection process for SOEs under the oversight of other central government institutions. However, in the case of autonomous administrations, the Ministry of Finance has the right to propose and select a representative. See Section 1.4.4 on board composition requirements for details.

← 23. https://www.cfrcalatori.ro/en/management.

← 24. https://www.romania-insider.com/romania-close-dismantling-cfr-marfa.

← 25. The national Property Fund was previously a major shareholder, but it divested its stake in 2015 and 2016.

← 26. For further detail, see https://www.romgaz.ro/en/consiliu-administratie.

← 27. Data includes the board composition as of 2021 of Posta Romana, CFR, Romsilva, CFR Calatori, Oltenia, CNAIR, Romgaz, Metrorex, Transgaz, CFR Marfa.

← 28. Anecdotal evidence also suggests that these interim members are replaced according to political cycles.

← 29. This is the case for Transgaz: https://www.realitatea.net/stiri/actual/controverse-la-vaful-unei-companiicheie-cum-a-ramas-seful-transgaz-pe-functie-cu-3500-de-leizi_621621efb3c9537a61419903

← 30. https://romania.europalibera.org/a/activipercentageC8%99tii-de-partid-care-conduc-firmele-de-stat-penelizarea-consiliilor-de-administrapercentageC8%9Bie/30767807.html; https://www-zf-ro.translate.goog/burse-fonduri-mutuale/fondul-proprietatea-critica-schimbarea-consiliul-administratie-20264190?_x_tr_sl=ro&_x_tr_tl=en&_x_tr_hl=fr&_x_tr_pto=wapp

← 31. However, at least one criminal investigation carried out by the National Anticorruption Directorate of a corruption case involving an SOE found that at the time of the facts, the chair of the board was also acting as CEO.

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