Otilia Frolu, Bancpost: I expect a recovery in the spending of European funds this year

Reporter: What do you think are the main issues that obstruct the absorption of European funds?

Otilia Frolu: European grants are the first sizeable public funds that the Romanian administration was tasked with allocating in exchange for meeting well established performance criteria. Overall, the expertise of the public administration consists of being able to allocate the public budget on the basis of a program which is still created annually, while allowing for major and sudden changes of the so-called "government priorities". As a result, the task of the allocation of European grants is not an easy one. The success of such a policy depends not only on the actions of the authorities, but also on the quality of the consultancy, of the entrepreneurship and on the banks, but first and foremost depends on the interaction between all these partners.

It may seem surprising that investment projects which had their grants approved would not be considered bankable. However, this has become quite usual and many financing contracts which received grants can"t get implemented because the banks refuse to provide funding. The eligibility filters differ: whereas the authorities are looking for and approve projects that reflect the commitment of the investors to a maximum of economic and social indicators - for development, the banks are reviewing the likelihood of the companies honoring the commitments made. This difference represents the project risk. In order to make a decision, banks evaluate the prior expertise of investors in the field in which they are proposing investment projects, as well as their ability to overcome the implementation difficulties and to complete the project.

When the borrowers are companies or public authorities, they frequently request funding for periods greater than 10 or 15 years, which involves a high degree of uncertainty and makes lenders reluctant, especially in the current context, where loans made to the government have a specific cost for maturities of a maximum of seven years.

Reporter: Which operational programs have a high absorption rate?

Otilia Frolu: The last six months have seen a sudden boost on the approval and contracting side, for all the operational programs, and the payments have practically doubled. The National Rural Development Plan (PNDR) has grown at a faster rate than the structural funds programs, and has become active six months earlier, and the current progress means that it should reach the required absorption rate by the set deadline. Overall, Romania is expected to make annual payments of 40 billion a year to meet those deadlines, and we have currently paid out approximately 11 billion, at the end of the first quarter. On principle we can achieve that goal, but it will take formidable and sustained efforts.

About a year ago, Romania reached the first billion lei paid for regional development projects which were part of the Regional Operational Program (POR), followed closely by the amounts paid for agricultural projects, through the National Rural Development Plan (PNDR). At the end of March 2011, agriculture had absorbed over 7 billion lei, whereas regional development had only absorbed close to three billion lei. We then have the amounts spent on projects for the development of human resources, over 2.5 billion lei.

We can also note the difference between the pace at which projects are approved and contracted and the rate at which payments are made. The PNDR succeeded in speeding up the pace of payments for projects contracted in mid-2010 and today we are seeing a rate of payments equal to half of the approved amounts, whereas structural funds have reached at most a third of the approved amounts.

When we look at the figures illustrating the absorption of funds, we note that right now, the value of submitted projects is at least double that of the funds allocated for the entire scheduling period. On one hand that is good, it at least means there is demand and there are enthusiastic promoters and that also means that a new profession is born, that of consultants for projects. On the other hand, we find that a significant part of the projects which are submitted are poorly written and do not meet the minimum score required to make them eligible, as well as many projects that are deemed eligible are not bankable, and therefore can"t be executed, or, even if they prove to be bankable, they have a hard time getting to the effective absorption, that is to the full deductibility of eligible expenses. Furthermore, this flow of documents is very taxing to the implementation authorities, which have to "correct" all these proposals within an allocated time frame.

Reporter: How big do you think the absorption rate will be by the end of 2013?

Otilia Frolu: I think that this year will be very important for the Romanian economy and I expect a recovery of these investments. I would like to believe that the current pace will continue and that it will lead to a full absorption of funds by the end of 2013, but it is highly unlikely, if the current system will continue in its current form, without any major changes.

Reporter: What are the solutions you are proposing?

Otilia Frolu: The outsourcing of several implementation sequences, including the allocation of funds to the banks, could be a solution, as long as it is accompanied by the specialization of employees of the implementation authorities in negotiating and monitoring contracts.

I think that the absorption of funds could also be improved through a quicker planning of the calls for projects. The amounts which haven"t been bid yet are known, and so are the amounts of the non-performing contracts, which need to be cancelled and relaunched. We can therefore pen a schedule for the launch of these amounts which would completely cover this year and even 2012. Such predictability would incentivize the promoters of projects to prepare better, thus raising the overall quality of the applications, submitted to governments and to banks as well.

Reporter: What was the past year like for Bancpost when it comes to the co-financing of projects funded using European grants?

Otilia Frolu: Bancpost entered the European grants segment in 2007, but providing loans for such projects began in 2009, grew in 2010 and we are still expanding. Our current portfolio has projects in various industries, food and food processing, construction, energy, forestry and services. The companies which we funded have prior expertise and we are confident in supporting them in the long run.

Reporter: What are the segments which have seen their projects rejected?

Otilia Frolu: Projects aren"t usually rejected because of the field they are in, but rather certain particularities of the sector can influence the decision on whether to release funding or not. For instance, the uncertainty on how the method for the implementation of the law for promoting the production of renewable energy has a major influence on the cashflow stability of businesses operating in this sector. In agriculture, where the market is extremely fragmented, where prices and practices differ from one location to the next, the qualitative analysis is far more detailed and the mechanism of the project needs to be far better defined.

Reporter: What should customers do to have eligible projects

Otilia Frolu: They need to start with an idea which would allow the business they are running to grow. The idea must be feasible, meaning it should be developed rationally and have a credible increase in turnover or the number of employees. Also, the idea of the project must prove bankable, that is the investor needs to ensure its own contribution to the project, together with the bank loan and the grants and to provide the minimum guarantees.