The latest report of the Court of Accounts shows that the amounts foreign investors brought as capital increases when they bought Romania’s energy distribution companies, did not in fact go to investments. At stake are penalties of EUR250 million demanded by the Romanian state.
Electrica, the only company controlled by the Romanian state active in distribution and supply of electricity, a EUR1.5 billion business, is involved in court battles with European energy companies which bought 5 of the 8 electricity distribution and supply subsidiaries from Electrica between 2005 and 2008.
Electrica’s action is a first for the Romanian state, who had in the past few years been accustomed to listening to advice from foreign institutions, selling assets at undervalued prices or complying with the demands of foreign companies in exchange for promises to invest. At stake are penalties of EUR250 million that CEZ (Czech Republic), Enel (Italy) and E.ON (Germany) are demanded to pay because they did not comply with the commitments made in the privatization contracts.
According to the latest report of the Court of Accounts, which concerns 2011, in the case of all five privatization contracts non-compliances were found with the way the money from the share capital increase was used.
In all privatization processes for the former Electrica Banat, Dobrogea, Oltenia, Moldova and Muntenia Sud, the Romanian state sold minority stakes. Later followed capital increases through which the private investors gained control of the companies, with the money injected being meant to be used for investments.
“This is about how the money from the capital increase was used. If you don’t use the money for investments, this is a problem. The state could have sold the majority stake in one go and collect the money in one go, but it favored this method in order to create an investment fund for the sold companies. If the money from the capital increase was not properly used, it would have been better for the state to sell the majority stake from the very start,” say sources close to the talks.
In the case of the privatizations of Electrica Banat, Dobrogea, Oltenia, the court cases have already reached the Court of Arbitration, and so could the cases concerning the privatization of Electrica Moldova and Muntenia Sud over the next few weeks. Electrica has already started to look for lawyers.
“In the case of the contract for the privatization of Electrica Banat, the buyer (Enel) as majority shareholder was found to be non-compliant with its obligation to determine the company to use the price of newly-issued shares, amounting to EUR46.6 million, to finance investments necessary to develop electricity distribution and supply activities with a direct impact on the calculation of electricity distribution fees,” reads the report of the Court of Accounts published in December last year.
Investments were conducted exclusively from cash flows generated from the company’s current activity. Citing non-compliance with contract provisions, Electrica brought the buyer to court, demanding 50% of the price of newly-issued shares, as provided for in the privatization contract, the report goes on to say, adding that at the time of the check, the court case was pending before the Paris Court of Arbitration.
Basically Electrica now demands penalties of EUR23.3 million from the privatization contract of Electrica Banat alone.
The same situation applies for Electrica Dobrogea, also controlled by Italy’s Enel, where penalties could reach EUR16 million.
“We have been at the Court of Arbitration with these two court cases since 2011, with the final hearings to take place in early March,” say the same sources.
In the case of Electrica Oltenia, which is now in the portfolio of Czech-based CEZ, penalties demanded by Electrica amount to around EUR18 million, with the case pending before the Paris Court since October 2012.
“At the end of last month notifications were sent to Enel for the privatization of Electrica Muntenia Sud and to E.ON for Electrica Moldova. In the case of Electrica Moldova, penalties could reach up to EUR20 million, while for Electrica Muntenia Sud the amounts stand at around EUR40 million, with the penalty accounting for around 10% of the capital increase,” the quoted sources also said.
The sources add that the companies have 30 days to produce the documents to prove that this money from the capital increases was in fact invested.
“If we get the documents, everything is alright, but from past experience we don’t expect this to happen,” said the quoted sources.
In the case of E.ON, Electrica’s battle is fought on several issues, which target intra-group transactions that were not reported on time and other issues.
The value of penalties demanded from Enel is EUR118 million, the sources say.
“For Electrica it is not a problem if it loses all these court cases, but if this happens, it would mean that most all findings of the Court of Accounts on these issues are erroneous to a certain degree. This could be seen as a first in terms of the Romanian state’s attitude. We don’t want anybody to get upset, but a balance must be kept,” the quoted sources also said.
(English version by Daniela Stoican)