Vol. X No.12
December 2005


The Property Fund –
An About Face or Another Slap in the Face?

The Property Fund – An About Face or Another Slap in the Face?...
Restitution of real estate wrongfully and abusively confiscated by the Communist authorities in Romania after 1945 has been an arduous and often pointless road traveled by their former owners. Beginning with the infamous Law No. 112/1995 (which did little more than codify the status-quo), and continuing with Law No. 10/2001 (which ostensibly offers a glimmer of hope to former owners, but more often merely prolonging the Romanian State’s dominion over its admittedly ill-gotten booty), Romanian law only occasionally offered workable solutions for the victims of communist-era expropriations.

The inadequacies of Law No. 10 have already been described in the March 2001 issue of the Romanian Digest, especially with respect to Article 16, which awarded former owners an “equivalent” form of restitution in the case where properties were used for a public or social purpose. Falling under this category were many properties occupied by various Romanian state institutions (such as schools, law courts, hospitals and clinics), socio-cultural institutions, political parties, NGO’s present in Romania, and much of what is being used and occupied by the diplomatic community. In addition, Law No. 10 failed to address the matter of restitution of agricultural land and other rural properties, which also remained in the hands of the State. Moreover, no law yet deals with the confiscation of businesses by the communists – enterprises that the Romanian state continues to privatize, the cash receipts for which it pockets without any recompense to the victims of its theft. The victims’ restitution rights under Romanian law are limited to real property. But even where a claimant has a legally enforceable cause of action, the sluggishness of the process presents further impediments to property restitution. Informed sources confirm that less than 15% of the real properties seized by the Romanian authorities have been returned by them to their former owners.

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A New Beginning
In the July issue of the Romanian Digest, we anticipated the passing of Law No. 247/2005, which we considered a golden opportunity for the Romanian authorities to finally right the human rights violations perpetrated against the former owners by the State. We noted that the general principles of the new regulations regarding properties were: (a) restitution in-kind of all the buildings which are in the possession of the State; (b) the allocation of "just and equitable" compensation; and, (c) the protection of tenants by way of tenant-protection laws which will remain in effect so as not to infringe on tenants’ interests. With respect to the first point, we discussed the significant expansion of the types of properties subject to restitution, including the important modification to Article 16 of Law No. 10, which eliminated many of the "public use" exceptions (provided that certain safeguards are put in place). We also pointed out that the new law shifts the presumption of a claimant’s ownership from the claimant-owner to the Romanian State, in order to alleviate the difficulty of proving one’s right to restitution in an environment where documents are often lost or missing. In that they opened the door to various classes of properties subject restitution in-kind, the effect of Law No. 247 has been to significantly improve the legal regime for the former owners.

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The Property Fund
The important improvements codified in Law No. 247, however, cannot guarantee that all former owners will enjoy the return of their old properties. Many properties were demolished decades ago, and others are still not subject to restitution in-kind even under the new regime. Under these circumstances, the new law provides for the possibility of financial compensation through grant of shares in a Property Fund.

The purpose of the Fund is to create an item of value that will constitute "just and equitable" compensation to the former owners, without burdening the Romanian State budget with billions of Euros worth of liability. As such, Law No. 247 has set up the Fund as a financial investment company, and the press has already dubbed it the “sixth SIF,” given its similarity to the current five well-known funds operating in Romania’s capital markets. However, the Fund will not be subject to a 1% equity ownership limit and will have no significant limits regarding the areas of investment of the assets which make up the Fund.

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Assets Valued at 5 Billion Euros
Initially the Romanian State, acting through the Ministry of Finance, will be the sole shareholder of the Fund before passing on shares to claimants as a function of the value of their successful claims. In all, the Romanian authorities intend to transfer assets valued at approximately 5 billion Euros into the Fund. In keeping with the concept of monetary compensation as damages for past injustices, taxes will not be paid on any aspect of the transfer and registration of Fund shares to claimants, although it remains unclear whether initial holders of these shares will be subject to full tax on capital gains or distributed dividends.

The assets which will make up the Fund include shares held by the State in approximately 100 entities, including some of Romania’s best-known (if not most profitable) institutions, such as Transelectrica, Loteria Romana, Transgaz, Romtelecom, Posta Romania, Petrom, Romtelecom, Conpet, the various “Electrica” and “Distrigaz” utilities, the Metrorex transportation utility, as well as the Henri Coanda, Baneasa, Constanta and Timisoara airports and the Galati and Giurgiu maritime ports. In most cases, the shareholding in these entities is between 10% to 20% of their total equity, so the Fund will not hold a controlling interest in some of these larger entities (unless the Romanian state has reserved any specific minority rights in any of these ventures). However, the Fund will hold a controlling interest in some of the smaller businesses which have been added to its portfolio. Originally, the Fund was also supposed to hold a 9.9% share of CEC and a 4% stake in the BCR banks, both of which are now being privatized. Since both entities are subject to privatization, the Romanian authorities have confirmed that they will contribute a pro-rated amount of the privatization proceeds to the Fund in line with the equity portion which would otherwise have been contributed to the Fund. In addition to receiving state-owned shares in various entities, the Fund's most bizarre component will include Romania's sovereign debt receivables from places such as Nigeria, Somalia, Tanzania, the Democratic Republic of Congo, the Republic of Congo, Sudan, Syria, Mozambique, Libya, Republic of Guinea, the Central African Republic, North Korea, Cuba and Mongolia – about 2.5 billion Euros worth of debt – at least on paper -- in all.

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Roll-Out in 2006
According to Law No. 247, the Fund is due to be up and running early in 2006. Until the compensation procedures are finalized, the Finance Ministry will represent the Romanian State as the sole shareholder of the Fund. Claimants seeking compensation under the restitution regime will have to file claims with the National Authority for Property Restitution (NAPR), which will assess the value of the properties that are the subject of restitution demands, and then issue compensation awards to be converted into shares in the Property Fund. With respect to former owners who won compensation awards under older restitution regimes, they too will receive inflation-adjusted awards of shares in the Fund, however, they will be restricted from trading in Fund shares for a period of 6 months following the award date.

In early 2006, the Romanian authorities will hold a bid to select the Fund manager, who will most likely be an internationally reputable firm from Wall Street or the City of London. The manager will, in turn, administer the fund according to the rules established by Government Decision and other internal rules subsequently adopted by the Romanian authorities. Once the Fund has been established, the timing of which will be around mid-year 2006, claimants will start receiving shares in the Fund.

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Is the Fund Workable, Let Alone "Just and Equitable?
Members of the media, stock brokers and representatives of the Bucharest Stock Exchange (BSE), not to mention claimants’ rights groups, have all had a hard time seeing the Fund as a workable solution. Their skepticism arises out of several areas. The first and most practical concern is the Fund's projected 2006 listing on the BSE (not to mention a listing on any other exchange). Under the current circumstances, with the Fund's administrator and internal rules still missing, it seems unlikely that the fund's portfolio of approximately 100 companies will be listed in 2006. In general, it takes anywhere between 6 months to 12 months to list a single company on the BSE, and even if the effort is done for all of the companies at once, the coordination and completion of the work seems likely to drift into 2007.

Another problem is that of evaluating the claims of the former owners who are subject to compensation through the Fund. Under Law No. 247, various attempts have been made to eliminate any subjectivity from the process of evaluating property restitution claims. However, the same legal regime also indicates that the evaluators will have to be insured in the event of an erroneous evaluation, and that they will be retained by the NAPR and paid by the Romanian authorities. Given this conflict of interest, it is not beyond imagination to assume that any evaluator hired by the Romanian authorities will find it hard not issue decisions which will be on the low side. Ideally, the Romanian government should continue to work with internationally reputable firms to eliminate the negative effects of this conflict of interest, but Law No. 247 does not seem to go far enough in ensuring a truly independent evaluation process.

On the flip side, the evaluation of the assets to be held by the Fund also presents substantial problems. While there is a basis for judging the market price for many of the shares of these entities (such as recent purchase of some of these shares by various international financial institutions, such as the EBRD), many of the entities on the Fund list may not benefit from adequate market measures of value. In addition, the value of other assets, especially that of the sovereign-debt receivables, are very difficult to determine. The Romanian authorities' reliance on the paper value of debts owed, for decades, by some of the world's poorest countries seems very optimistic, to say the least. Were they to sell such interests on the open market, they would be lucky to get 5 cents on the dollar for most of them. Thus, without a proper, outside evaluation done in real time for all of the Fund assets, a true value of the compensation awarded under the Law No. 247 will remain highly speculative.

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Can the Fund Cover All Claims?
The issue of the value of the Fund's assets will lead to additional questions about the effectiveness of the Fund as a tool for compensating the former owners. First, there is no guarantee that the Fund (if its value will indeed be 5 billion Euros) will cover the value of all of the claims filed with the NAPR. In the event that the Fund's value has already been parceled out to winning claimants, what will happen to subsequent claimants? Similarly, the very nature of the Fund will lead to a drag on prices, since many of the former owners who will receive shares in the Fund will be of an advanced age and will, most likely, wish to sell their shares within a few months of award, rather seeing them as a long-term investment. As there is a rush to sell, the Fund's price per share will fall, leading to the situation in which the NAPR will have to issue increasingly larger portions of the Fund's shares to cover subsequent claims. According to the NAPR's own estimates, it should receive between 100,000 and 120,000 compensation claims from former owners, out of a total of 250,000 total restitution claims. Assuming the official valuation of 5 billion for the Fund, each claim would have to be under 50,000 Euros in order to cover a majority of such claims, even without a rush to sell the Fund's shares. In the event that the Fund cannot cover successful claims, the authorities will either have to add to the list of assets making up the Fund, cover compensation claims from the national Budget, or leave subsequent owners with worthless Romanian judgments, none of which options will be easy for Romania to bear.

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The Property Fund appears to be a good, if flawed, idea. Certainly, it is an improvement over past practice. However, many details will have to be worked out by the Romanian authorities, their hired evaluators and the administrators of the Fund, if the idea stands a chance of living up to its potential. In this environment of uncertainty, a few things are clear. From a matter of timing, Romania's forecast of getting the Fund off the ground in 2006 seems overly optimistic, and it will probably be unreasonable to expect that the Fund will be listed with the BSE, let alone facilitate awards, prior to 2007. A more significant aspect of the Fund (and with Law No. 247) is one of moral rectitude. The Fund and the new law, for all their faults, constitute Romania's first real, if half-hearted, attempt to actually provide a restitution regime that acts in the interest of the former owners. By providing a workable solution to the issues of property restitution and "just and equitable" compensation, Romania should receive the full support of the international community so that these goals may become a reality.

However, if Romania again fails to do justice to the victims of communist confiscations, it will undoubtedly find itself defending its actions in international forums and over more than just real property claims, at least with respect to the major claimants. Everyone recognizes that Romania has limited cash resources out of which to provide restitution that is not in-kind. But it holds a vast amount of properties that can be used for restitution the loss of which would not drain its budget and might actually spur new investment and development. Romania will soon join the European Union where the respect for human rights is paramount. Retaining all or part of the plunder of past governments, while admitting the dastardly nature of the thefts, is neither justice for the victims nor honorable for Romania.

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

Copyright 2005 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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