Insolvent town exposes gulf between EU dreams and reality

Insolvent town exposes gulf between EU dreams and reality

Sun, Sep 1 2013

By Luiza Ilie

ANINOASA, Romania (Reuters) – On an abandoned storefront, an old poster advertises one of the few career opportunities available in this Romanian town: naked webcam models wanted for Internet chatrooms. If joining the European Union was supposed to lift Romania out of poverty, it has yet to work in Aninoasa, a town of 4,800 people in the mountainous central region of Jiu Valley. Six years after Romania’s accession to the EU, not only is Aninoasa still poor – it has also become the first town in Romania to file for insolvency.Town officials took out a bank loan to fund investment projects, they could not repay it, they fell behind on paying other bills and over the years they got themselves so deep in debt they could not carry on.

“Our mayor likes to joke there are only two major towns in insolvency in the world, Detroit and us,” said deputy mayor Adrian Albescu, brought in last year after the previous administration lost the election. “For the past year we have done nothing else but pay debts.”

Aninoasa’s experience raises a question: did the European Union make a mistake when, six years ago, it admitted Romania, a country with living standards and levels of governance well below the average for the bloc?

It’s not just about Romania. Bulgaria joined at the same time and is still saddled with corruption and poverty, Croatia joined in July bringing problems of organised crime and the legacy of war in the 1990s, and EU candidates such as such as Albania and Macedonia have even deeper troubles.

In Romania’s case the calculation was that pressure from Brussels, coupled with EU development cash, would help the country catch up. In many ways it has: Romania’s economic output has almost doubled since 2006.

But in other respects, the lessons learned with Romania, as well as neighboring Bulgaria, could make the EU much more skeptical the next time it contemplates bringing in new members.

When enlargement is next on its agenda, the European Commission will view the experience with Romanian local administrations as a “negative example,” said Sergiu Miscoiu of think tank CESPRI.

SPIRAL OF DEBT

One of the biggest difficulties for Romania is that, while billions of euros worth of EU funds are on offer, it often fails to qualify for the money because it cannot convince Brussels it will spend it honestly and efficiently.

In Aninoasa, former mayor Ilie Botgros held the office for 20 years until he was defeated in an election last year.

During that time the town’s economy declined, a process which accelerated in 2006 when the government shut down the coal mine that was the town’s sole employer.

As income from local taxes fell, the town hall’s revenue shrank and officials now have only 4.2 million lei ($1.25 million) per year to cover staff wages, public utility bills and much-needed projects to improve infrastructure.

Many of the roads in the town are surfaced with gravel, some neighborhoods are not connected to the sewage system or gas supply, and there are hundred-year-old buildings which have no central heating against freezing winter temperatures and are in dire need of repair.

The town currently has only two projects with European funding: one is a sewage scheme, the other a move to renovate Aninoasa’s cultural centre, which should include a gym, a library and meeting hall.

Botgros went instead to the bank. In 2006 he took out a loan worth 3 million lei ($893,600) from Romania’s top lender BCR, owned by Austrian Erste Bank. He said he used the money to pay off previous investments, including work on a bridge and a gas pipeline in the north of town.

But the debt was stacking up. By now, Aninoasa has debts worth a total of roughly 6 million lei. The town owes money to 70 service providers. Public lighting was cut off for months last year because of unpaid bills.

The town could have carried on getting deeper into debt, but this year Romania tightened up its rules on municipal finances.

It started enforcing a law that requires local governments to file for insolvency if they are 120 days or more behind with repayments and their debt exceeds 50 percent of revenue. Aninoasa filed for insolvency in June. A court-appointed administrator is working on a plan to tackle debts.

The new mayor has filed a criminal complaint against Botgros over his management of town finances, and prosecutors have launched an inquiry, but it is too soon to tell whether any charges will be made. Botgros denies any wrongdoing.

“Do you really think that after 20 years in office I went crazy or started stealing money or something,” said Botgros, who is now a local council member and plans to run for mayor in the next election. “I say I did what was needed for the community.”

WEAK INSTITUTIONS

Aninoasa is probably not the last town that will file for insolvency. A study from the independent Institute for Public Policy showed hundreds of towns cannot cover their running costs, let alone invest in basic infrastructure. Poor tax collection and one of the EU’s highest inflation rates do not help.

As with Aninoasa, EU money is available in theory, but in practice a highly segmented local administration is too weak to be able to use the funds effectively.

Romania ranks 116 out of 144 states in an index of institutional strength, according to the World Economic Forum’s competitiveness report.

The EU has set aside 20 billion euros in non-refundable development money for Romania to build roads, sewage systems and central heating facilities in its impoverished regions during 2007-2013, aimed primarily at local authorities.

The country has so far secured only a fifth.

Roughly one in two mayors that have tapped funds were penalized later for various irregularities. The European Commission briefly blocked funds last year.

“There is reluctance to talk about European funds given that it is not simple to tap them, it is not simple to implement projects,” said Elena Iorga of the Institute for Public Policy.

A lack of competence is, in some cases, compounded by cronyism and corruption – adding to the EU’s reasons for not allocating cash.

The National Integrity Agency, an anti-corruption watchdog, has ruled that 193 mayors, deputy mayors and councilors had conflicts of interest, falsified statements or had wealth they could not account for since the middle of last year.

A study by the agency of 2,856 local councilors from all political parties showed almost half of them or their spouses owned private service providers, several of which had been awarded public contracts. ($1 = 3.3572 Romanian lei)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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