State aid has always been a success story in Romania, with a lot of companies developing medium-sized investment projects based on money coming from Romanian authorities. And the success story continued through 2018 and into 2019. But let’s look at this story from the beginning.
In the first few years after the launch of state aid in Romania – i.e., from 2008 – a rather small number of companies were interested in applying for such financial incentives, probably due to the restrictions imposed at the time (i.e, a minimum investment of EUR 30 million) and because the global environment was not favorable for investments. However, as interest grew over time, so did the number of projects for which state aid was granted. Overall, in the first state aid phase (2008-2014), there were 83 investment projects approved, with a state aid value of more than EUR 700 million. According to the representatives of Romania’s Ministry of Public Finances, there actually were significantly more applicant companies, but some were rejected due to inadequate or incomplete documentation, unrealistic financial projections, or failure to meet state aid requirements.
Scoring criteria were introduced in 2016, allowing the Ministry of Public Finances to conduct a transparent decision–making process in selecting the relevant projects. This approach was challenged by businesses and some professional bodies, however, and a new and more flexible granting mechanism was implemented in September 2018. The new mechanism is clearly much more investor-oriented, although there are still companies whose applications fail based on improper documentation. While involving a consultant might not be of particular significance in other countries, in Romania the expertise arising from the successful cases has become critical, as the country’s state aid legislation is rather brief and practical experience can turn a promising project into a successful one.
According to the recent statements of state representatives, the Government will continue to support viable investment projects, as significant amounts have been allocated in the national budget for that purpose. The latest publicly-available information indicates that more than EUR 400 million has already been granted to 40 projects, with close to EUR 500 million remaining in the budget for use by 2020. The current scheme for investments in assets – which is regulated by Government Decision no. 807/2014 – allows investors to benefit from the same conditions as in the past: a refund of up to 50% of the cost of the assets, paid entirely in cash. The refund rate of 50% is very high compared to other CEE countries, where companies receive an average of only 20-30% in state aid.
Companies applying for state aid can either be new or existing and can be either large enterprises or SMEs to fulfil the eligibility criteria, and of course must be active in fields compatible with state aid (which most are, with the exception of, among others, the mining, construction, trade, and transportation fields). The main eligibility criteria include parameters such as the level of investment (a minimum of EUR 1 million), profitability in past years, and financial ratios (e.g., return on turnover, net assets, and share capital level). These differ depending on the type of investment project (i.e., long-established versus newly incorporated companies).
The state aid scheme offers advantages to both the Romanian State and the beneficiaries of the incentives. While the benefit is obvious for companies, for the State the advantage comes from payments in the form of employer and employee contributions, profit tax, and local taxes. Furthermore, investment projects have a multiplying effect on the national economy, generating additional investments, jobs, and additional contributions to the State budget. Economic and political aspects show that state aid will continue to be an important tool for attracting private investment, and will provide both local and foreign investors with a viable source of financing that can be used to supplement existing financing sources.
By Iulian Sorescu, Head of Financial, State Aid & Management Consulting Department, and Sebastian Popescu, Counsel, Noerr
This Article was originally published in Issue 6.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.