The China Investment Forum is a platform that actively supports economic cooperation and investment between the CEE region and the People’s Republic of China. It provides current information on new opportunities and the business environment in today’s China, supports Chinese investors in Europe, and at the same time supports exporters to China. Kamil Blažek gave a speech on the necessity of increasing European exports to China and strengthening mutual cooperation.

The China Investment Forum is organised under the auspices of the Ministry of Industry and Trade of the Czech Republic and the Ministry of Foreign Affairs of the Czech Republic, with the official support of the European Union delegation to China and the Ministry of Trade of the People’s Republic of China. The forum was organised mainly with the support of international corporations including Škoda/Volkswagen, PPF and Bank of China.

Kamil Blažek stated: “The main cause of the increase in trading and foreign direct investments from China into the CEE region and especially into China is consistent and intense support from government and other public institutions for commercial relations with China, including visa policy, export support and highlighting positive examples. The Association for Foreign Investment is going to be intensively involved in all of these activities.”

Foreign direct investment to Romania has come to a virtual standstill since the onset of the financial crisis. Gone are the days of the “Romanian Tiger” in the 1990s and early 2000s, when the country’s economy was growing by more than 8% annually.

Daniel Torsher, Managing Partner of Kinstellar’s Bucharest office, points out that it took time for business people in Romania to feel the full impact of the crisis and adjust to the new reality: “People realise now that we are in a completely different economic environment than we were three or four years ago.”

Areas of possible new investment

M&A and real estate were among the principle drivers of Romania’s growth previously. With activity in these areas significantly diminished, the country is hoping to attract new investment in the core areas of infrastructure and energy.

Although roughly the size of the UK, Romania has only 200 km of motorways (compared to 3,500 km in the UK). Even during the growth years, Romania was unable to take existing plans to expand the country’s infrastructure forward, and this is proving to be an obstacle to growth.

Successive governments have tried to promote projects through public-private partnerships, but the legal frameworks for these have been too complex and no new projects have started. Efforts are underway to remedy this, but progress remains slow.

Investment into Romania’s energy sector, it is hoped, will be faster. One large project involving private investors is the expansion of the Cernavoda nuclear power plant. Investment into renewable energy, such as wind power, is also expected.

As Daniel Torsher explains: “There is a lot of focus on wind power. It hasn’t developed that significantly until now, but that is primarily down to the fact that the regulatory environment wasn’t right.” He goes on explain that investment into renewable energy projects is expected to pick up following the EU’s recent approval of Romania’s “green certificate” regulatory scheme.

Corruption and the slow pace of reform

Investment into Romania also remains muted by concerns over the country’s lingering problems of corruption. This is particularly true regarding infrastructure projects. But corruption is not the only factor that inhibits growth.

Daniel Torsher comments: “There is a consensus at a fairly general level that corruption is an issue, but it is not an issue that is unique to Romania – you see it all over the region. Another factor are the public procurement rules. In common with other countries in the region, Romanian procurement rules allow people to contest decisions very quickly. It is a difficult and slow process, and it is almost de rigueur as part of the process that someone will contest. There is a lack of finality […] and that is frustrating and slow things down.”

Another frustration for investors, and one that contributes to uncertainty, is the frequency at which the government amends public procurement laws and other regulatory frameworks. One recent and significant change to the country’s legal environment is the new and completely reformed Civil Code, which brings a major change for the legal profession.

“It is a good step forward,” Daniel Torsher explains. “It has been done relatively quickly for a project of that scale. And though everyone is anticipating a period of adjustment, it will affect the whole economy immediately.”

The decrease in transactions means an increase in competition among law firms

Although Romania is taking steps to implement reforms, no one is expecting a dramatic pick up of investment in the near term. For the legal profession, the decrease in transactions has had led to a drop in turnover and increased competition. The article points out that some law international law firms in the country may find it difficult to sustain their businesses.

Daniel Torsher comments: “Some [international law firms] continue to have futures in Romania. Some appear to have a coherent strategy that they follow; others seem to take their decisions in a more piecemeal fashion. I’m not hearing of any of them getting cold feet at the moment, but it is often the case that the people on the ground […] are the last to know when a decision has been taken to pull the plug.”

Romania joining the euro would strengthen investor confidence

Another factor that affects the business environment in Romania is the country’s intention of joining the euro. Before the sovereign debt crisis hit, Romania was hoping to join the single currency by 2013. With the crisis underway, it now seems this will not happen until after 2016 at the earliest. Despite the delay, there are strong signs that the country remains committed to joining the euro-zone, and postponing the date should, in the end, strengthen Romania’s position.

Bogdan Bibicu, Partner in Kinstellar’s’ Bucharest office, explains: “ The man in the street would be in favour of full adoption today. But the government and the national bank have adopted a more cautious approach. They maintain that Romania should only go in when we are fully prepared economically for the consequences.”

The article concludes that as the EU increases the fiscal criteria that euro-zone members must meet, Romania’s eventual membership in the single currency should raise investor confidence. 

The energy sector in CEE countries is of particular interest to Chinese investors, as the sector has been less affected by the economic downturn. Chinese companies are already involved in large-scale power plant projects in the region and have expressed interest in nuclear power projects.

China has indicated that it views Hungary as a “beachhead” for increasing its investment in Emerging Europe and part of its strategy to strengthen economic ties with the European Union.

Chinese investment in Hungary is set to increase, following the signing in June of 12 bilateral agreements, which among other provisions introduces investment incentives for Chinese companies in Hungary and envisions joint venture infrastructure, transport and energy projects. With the new agreements in place, China has said it expects bilateral trade with Hungary to double to €20bn by 2015.

Răzvan Popa joined Kinstellar in 2009 as a counsel and has been instrumental in the development of Kinstellar’s office in Romania. A Romanian qualified lawyer, Răzvan heads the local Corporate and Real Estate practice areas. He has extensive experience in advising leading international and local companies in relation to a wide spectrum of investment projects in Romania and is committed to further developing and enhancing the firm’s practice.

Jülide Güney joined the firm on 12 September 2011. A Turkish qualified lawyer, Jülide specialises in banking, in particular project finance and general transactional banking.  Jülide has also worked on a wide range of corporate and energy transactions, including competition and privatisation matters, advising international and local investors in Turkey. Jülide was general counsel for the Turkish operations of Cimentas Group / Cementir Holding,  and prior to that was with Denton Wilde Sapte & Güner Law Office in Istanbul. Jülide ıs an ımportant part of our ambitious plans to further build the firm’s presence in Turkey and the Emerging Europe region. 

Jason Mogg, firm Managing Partner, comments:

‘Răzvan and Jülide each have excellent experience and are well respected professionals in their markets. These developments represent another very positive step in the expansion of our capabilities. We are confident that Razvan and Jülide will each make a major contribution to the success and development of their offices and to the whole firm’s expansion and growth in the region.”

Czech Property Investments, one of the largest and most active investment and development groups in the area of commercial properties on the Czech market last year< acquired the Olympia shopping centres in Teplice and Mladá Boleslav from Union Investment Real Estate (Germany) and CA Immo (Austria). The purchase price for both the centres exceeded CZK 2.4 billion (EUR 96 million). The shopping centres extend over a total area of nearly 54,000 sq. m. (of which Olympia Teplice over 32,000 sq. m. and Olympia Mladá Boleslav over 22,000 sq. m.). Kinstellar provided structural and transactional advice in connection with the negotiation of the deal, a full due diligence and the contractual documentation.  

Kamil Blažek, a partner at Kinstellar adds: “This is another significant acquisition in the process of expansion of CPI’s investment portfolio by which CPI confirms its dominant position on the property acquisition market.” 

The Kinstellar’s team involved in the transaction was formed by Klára Štěpánková, Martin Němeček, Tomáš Čihula, Aleš Cemper, Jitka Bortlíčková, Daniela Opletalová (neé Machová), Jakub Chmelík, Filip Brtník, Michal Forýtek, Lucie Kislerová, Marek Disman.

With a view of bringing the competition legislation in line with the EU legislation, the relevant authorities have substantially reformed the Romanian competition legislation during 2010 – 2011, by amendments brought to the Competition Law no. 21/1996 and new versions of secondary legislative measures (i.e. regulations and instructions).

The amendments incorporated elements taken from the Community competition law and European Commission codes of good practice, but also from the practice of the European courts, with the declared aim to coordinate better domestic legislation with articles 101 and 102 of the TFEU and with the Regulation No. 1/2003.

In July 2011, the relevant authorities have amended the recently modified competition legislation (i.e. Ordinance no. 75/1010) by Law no. 149/2011 (the “Law no. 149”).

Main Amendments Brought by Law no. 149

The decrease of the authorisation tax for economic concentrations

Law no.149 has established a clearance fee in merger control cases between EUR 10,000 and EUR 25,000 (before the amendment the authorisation tax for economic concentrations was established at 0.04% of the total turnover achieved by the concerned undertakings in Romania, capped at EUR 100,000). The instructions related to the modality of calculation should be issued shortly by the Competition Council.

Point to consider: positive impact on further transactions by reducing the administrative tax.

Reduced amount for the bail in cases of suspension of the Competition Council’s decisions

Previously, where a sanctioning decision was challenged, the suspension of its enforcement was granted by the court only subject to the payment of a bail of 30% of the fine imposed by the challenged decision. Following the enactment of Law no. 149, the bail cannot exceed 20% of the fine imposed and it will be determined by the Court.

Point to consider: a better access to court suspensions claims for the sanctioned undertakings.

The existence of a market share in excess of 40% treated as a presumption of a dominant position

According to the Amending Law and its new wording, the burden of proof related to the absence of a dominant position lies on the undertaking with a market share above 40%.

Other Noteworthy Amendments

—    The decrease of the level of the fine with an amount up to 30% (from 25%) after receiving the investigation report by the undertakings for those entities admitting the violation of the competition law provisions. In order to benefit from the reduction of fine, it is mandatory for undertaking involved to propose remedies and remove the consequences of the violations concerned.

—    The information obtained during an investigation may be used not only for the purpose of such investigation, but for the purpose of all violations of competition law. Moreover, other authorities may be informed by the Competition Council insofar issues falling within their competence are being discovered.

—    Decisions of public authorities violating the competition legislation may be declared null and void.

—    The establishment of a consultative body that will issue non-mandatory opinions concerning the main aspects of the competition policy.

—    Oral hearings before the Competition Council in case of investigation are no longer mandatory in all cases, the parties involved may request such hearings.

The Competition Council is responsible for sanctioning unfair competition behaviour stipulated in Law no. 11/1991 on unfair competition and may use all procedural means provided by the Competition Law to discover acts of unfair competition (important amendments to the Unfair Competition Law  are expected in the near future).

Kristóf Ferenczi, Head of Kinstellar’s Energy practice and Partner in the firm’s Budapest office, explains the new rules for the revised EU Emission Trading Scheme (EU ETS) that will take effect in 2013 and its implications for Hungary.

The EU ETS system, which was first put into operation in 2005 and revised substantially in 2009, introduced the cap-and-trade mechanism for CO2 allowances. To date, such allowances have been issued and managed by national registries operated by each Member State. The vast majority of allowances (currently around 90%) have been issued free of charge.

From 1 January 2013, the rules of the game will change substantially. Among the important new changes are:

• National registries for carbon allowances will be replaced by an EU-wide registry, operated by a central EU administrator.
• Public auctions of carbon allowances will become the general rule, i.e., Member States will auction their CO2 allowances via an EU-wide platform.
• Unless a given installation is covered by a specific exemption, the operator of the installation must purchase the required quantity of CO2 allowances at a public auction at the prevailing market price.
• 50% of auction revenues derived by a Member State must be used to meet the country’s CO2 reduction targets, whilst 50% may be used for any other purpose, including general budgetary purposes.

Implications for Hungary

Under the new rules, exemptions are available to Member States in CEE to allow certain power plants meeting all requirements to continue to receive up to 70% of their emission allowance free of charge until 2019. This is of particular relevance to Hungary and poses something of a dilemma for the Hungarian government, which has until 30 September 2011 to decide if it will apply for the above exemptions.

If the Hungarian government does not apply for exemptions, starting in 2013 most power plants in Hungary will have to buy all their carbon allowances at the central EU auction platform at market prices. This will bring a fundamental change to the operation of Hungarian power generators and will likely lead to an increase in wholesale electricity prices and potentially trigger the closure of less efficient power plants, which will require replacement of lost generating capacity.

However, if the government does apply for exemptions for qualifying power plants and continues to allocate emission allowances free of charge, it will in effective be forfeiting a significant amount of its potential CO2 auction revenues.

The Turkey chapter gives a high level review of the Turkish capital markets regulatory scheme, procedures for debt and equity capital markets offerings, publicity restrictions, private placements, offshore offerings, underwriting arrangements, issuers’ continuous disclosure obligations and other key issues of interest for capital markets participants. 

The Turkish chapter is accessible at this link.

For further information, please contact:

halide.cetinkaya@kinstellar.com

kemal.ertug@kinstellar.com    

The governing party Fidesz, which won a landslide parliamentary election in 2010, is planning significant amendments to the constitution and has also implemented a series of plans to revive the Hungarian economy. However, to date, the government’s programmes have not led to a significant increase in deal-flow for law firms in Hungary. The “crisis tax” imposed on foreign companies in certain sectors earlier this year has not helped matters.

Csilla Andreko, Managing Partner of Kinstellar’s Budapest office, explains that most law firms in Hungary are sourcing or carrying out work across the region, and not just in Hungary.

Expectations remain that the Hungarian economy is on the rebound and will avoid the pitfalls of Ireland and Greece as the government employs measures to reduce debt and create new jobs. Law firms in Hungary anticipate an increase in workflows in the wake of economic reforms.

Lawyers in Belgrade are hopeful that the arrest of former Bosnian Serb general Ratko Mladic will help boost investor confidence in Serbia. Branislav Maric, Partner in Kinstellar’s Belgrade office, comments: “The Belgrade Stock Exchange is not something that can reflect major change, but there was an increase in value following his arrest.”

The Serbian government, keen to speed up the country’s accession process towards EU membership, is enacting a series of reforms designed to update and modernise the country’s regulatory environment. Reforms in particular are targeted at capital markets, corporate governance and IP.

“For lawyers, it means that the legal environment is rapidly changing. There will be requests from clients for new legal provisions and guidance. Serbia’s EU candidacy is politically important for Serbia and should result in a positive climate for the market in general,” Maric explains.

While there are expectations for a turnaround in the Serbian economy, there are still hurdles to overcome. The article points out Serbia’s failed attempts thus far to privatise Telekom Srbija and pharmaceuticals maker Galenika, but notes that the privatisation process is expected to resume. National air carrier JAT is also slated for privatisation.

Despite the challenging economic situation, there are some areas of the economy that are currently showing promise in Serbia. Among these is the energy sector, including renewable energy. Maric points out that there are several wind farm projects in Serbia nearing completion or waiting for an investor to take over the concession. Solar and hydropower projects also show promise in Serbia.

Government subsidies and loans have also helped to attract investors to Serbia, including Fiat, which in June 2011 received a €200 million loan guarantee from the Serbian state to help it finance the modernisation of its auto assembly plant (the former Zastava plant) in Serbia.

As Maric explains, this kind of government support for investors is: “fuelling new investment. It has caused the creation of a cluster of car producers coming to central Serbia, where this activity is taking place.” He also points out that recent efforts to upgrade Serbia’s PPP legislation should help kick-start infrastructure projects.

The article notes that Serbia’s current economic difficulties are making it hard for some law firms to compete, and there have been some departures from the market. Kinstellar opened its Belgrade office in March 2010. Maric explains that Kinstellar’s opening has gone well, despite the recession.

“It can only be viewed as a long-term investment. Kinstellar focuses on high quality, high complexity work, and we think there is a need for the type of profile we represent. We think we can add something to the market in that respect.”

Lukáš Ševčík, managing partner of the Kinstellar Prague Office, has been elected a new regular member of the board of directors of the British Chamber of Commerce at its annual meeting. Since 2005, the British Chamber of Commerce in the Czech Republic has been operating under the auspices of Kinstellar with the firm’s participation in its workings and activities.

As Lukáš Ševčík believes, he will further contribute to the strengthening and highlighting of the primary objective of the Chamber of Commerce, which is the development of business opportunities. “In my position, I will make every effort to stimulate the Chamber’s activity towards direct support of specific opportunities for its members. Therefore, as the first step, I initiate the formation of a new working group which will deal with these activities. I am convinced that the British Chamber of Commerce has a great potential to further develop in this area.” Lukáš Ševčík said.

The British Chamber of Commerce is one of the most important chambers of commerce in the Czech Republic serving as a platform for the support of trade, business development and investment activities between the UK, the Czech Republic and other countries.

Czech Property Investments, one of the largest and most active commercial real estate investment groups in the last year bought a portfolio of 14 retail parks in the Czech Republic and Slovakia from the Austrian developer Real4You worth over CZK 1.6 billion (EUR 64 million). The retail parks extend over nearly 50.000 sq. m. Kinstellar advised on structuring and transactional issues in negotiating the deal, due diligence and the contractual documentation.  

The retail parks accommodate Penny Market stores as well as the well-known Family Centres and in addition to a selection of store chain food items they offer clothing, footware, drugstore products, electronics and other goods.

The whole transaction involved negotiations with 14 parties in the Czech Republic and Slovakia while funding for the individual parks was provided by different banking groups. The advice covered not only completed and fully let commercial areas but also areas under construction with a lease option.

Kinstellar’s partner Kamil Blažek adds: “The acquisition of Real4You was a very complex one as it involved four national laws and a relatively highly diversified portfolio which made the execution of the transaction very demanding.”

Lukáš Ševcík, Managing Partner at Kinstellar’s Prague office, comments: “You never know when one of the other international players will pull out,” “It’s just a result of the highly competitive market here. There are always some long-term rumours about most of the firms having plans.”

Ševcík goes on to highlight the recent growth trends in the Czech legal market. Describing a pick-up in general M&A activity since the end of 2010, he comments: “I have to say we’ve seen increased activity across the office. The beginning of last year wasn’t so good, but then it really picked up and started to move forward at the end of the year. It carried on nicely in January and February and now into March it looks strong as well.”

A large part of new investment is being driven by private equity activity. Ševcík explains: “Kinstellar has done deals with both buyout and private equity funds exiting and strategically buying. There is much more activity, and purchasers and sellers seem to have found common ground on pricing.”  The article also notes that the Czech Republic has seen a somewhat surprising, and welcome, return of activity on the real estate market.