ROMANIA: PROFESSIONAL MANAGERS (FINALLY) IN CHARGE

C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000101

SIPDIS

STATE FOR EUR/CE ASCHEIBE AND EUR/OHI SE KENNEDY

E.O. 12958: DECL: 02/24/2020
TAGS: EFIN ETRD ECON CASC PGOV RO
SUBJECT: ROMANIA: PROFESSIONAL MANAGERS (FINALLY) IN CHARGE
OF THE PROPERTY FUND

REF: 09 BUCHAREST 427 AND PREVIOUS

Classified By: DCM JERI GUTHRIE-CORN FOR REASONS 1.4 (B) AND (D).


1. (SBU) Summary. After a series of politically-motivated
delays, the Government of Romania (GOR) signed a contract
with U.S.-based Franklin Templeton Investments to manage the
Property Fund ("the Fund") on February 25th. Despite early
hopeful signs (reftel) that this management contract would be
signed well before the end of the summer of 2009, political
considerations and private interests conspired to delay the
appointment of an outside fund manager by more than six
months. The appointment of Franklin Templeton is a victory
for transparency and good governance, as it follows a free
and fair selection process. Franklin Templeton's involvement
with this 2.7 billion euro fund offers hope that Romania's
drawn-out property restitution saga is now entering its final
chapters. End Summary.


2. (C) When the Fund was initially established, one of the
underlying goals was to transition management from the GOR to
a professional fund manager as soon as possible in order to
maximize the value of the compensation granted to former
property owners. Unfortunately, inclusion of profitable,
"strategic" companies in the energy, transport, and
telecommunications sector proved to be almost too valuable to
relinquish, resulting in significant GOR foot-dragging. The
members of the government-appointed supervisory board found
themselves charged with eliminating their own very lucrative
positions, while individual Ministers saw an end to the
patronage network offered by their sole control over state
companies.


3. (C) There was a palatable shock throughout the system when
Franklin Templeton emerged as the winner of what turned out
to be a transparent and unassailable tendering process.
Lacking any reasonably coherent grounds to overturn the
selection process, politically connected interests turned to
delaying tactics, giving the GOR time to reorganize several
companies within the Property Fund's remit, including the
"crown jewel" energy companies and airport authority.
Various pretexts, including the abrupt resignation of the
chairman of the Selection Commission days before he was due
to sign the management contract, were concocted, giving the
GOR breathing room to do the necessary house-cleaning before
opening the books to Franklin Templeton. The personal
engagement, at the Ambassador,s request, of both President
Basescu and Prime Minister Boc finally broke the logjam.
Franklin Templeton's patience and willingness to finesse the
terms of the management contract to win over doubters also
helped to overcame lingering resistance. Franklin Templeton
will now see in the coming weeks whether or not this delay
resulted in any long-term damage to the Fund's underlying
assets.


4. (SBU) Franklin Templeton plans to bring in an experienced
in-house team to manage the fund initially, while slowly
building up a local operation. The team will be under the
overall direction of David Smart, Global Head of Sovereign
Funds and Supranationals, with Mark Mobius, Executive
Chairman of Asset Management, providing additional advice and
assistance. Admitting that they are "inundated" with
resumes, David Smart said that Franklin Templeton plans to
take its time to identify the very best locals to employ, but
that he does expect staffing to become increasingly Romanian
over the medium term. The short-term goal is to evaluate the
assets under management and prepare the Fund for a listing on
the Bucharest Stock Exchange. Smart added that there is also
interest in a dual-listing, probably in London, which would
bring strong corporate governance rules into play, improving
Franklin Templeton's ability to manage both the Fund and the
companies it owns.


5. (C) Comment. Franklin Templeton's involvement with the
Fund will provide real and direct benefits to current
shareholders. At the same time, the Fund will be the single
largest listing on the Bucharest Stock Exchange. The fact
that it will be under the management control of a
well-regarded U.S. company has the potential to pay wider
dividends, as best-practices are transmitted through the Fund
to the broader equity market. This will boost transparency
and improve corporate governance. The lingering worry is
that Franklin Templeton gave away too much in altering the
terms of the management contract and that the new managers
will be stymied by vested interests. The Ministry of Finance
will remain the single largest shareholder until the
restitution process concludes, while control over many state
companies will continue to be split between the Fund and
various ministries. Post has sensitized Franklin Templeton

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to these issues and has encouraged the company to pay careful
attention to managing the relationship with the GOR. Still,
the process of ceding control is slowly and inexorably
advancing, improving the long-term prospects for both
Romanian capital markets and the Fund itself. End Comment.
GITENSTEIN