metadata: authors: 0: author: Aprahamian,Arabela Sena
1: author: De Rosa,Donato
2: author: Iootty De Paiva Dias,Mariana
3: author: Pirlea,Ana Florina
4: author: Stanescu,Alexandru Cristian
count: Romania,EU Accession Countries
docna: 0: docna: Product market policies in Romania : a
            comparison with EU partners
docty: Policy Research Working Paper
subtopic: Private Sector Economics,Labor Markets,Energy Policies & Economics,Private Sector Development Law,International Trade and Trade Rules,Marketing,Energy Demand,Energy and Environment,Energy and Mining
abstracts: cdata!: Romania's European Union accession
            in 2007 has resulted in a substantial reduction of the
            formal barriers to integration with the European Union
            Single Market. This study takes stock of the progress by
            benchmarking product market policies in Romania to those of
            European Union countries, as measured by the OECD indicators
            of Product Market Regulation. These indicators allow for a
            comprehensive mapping of policies affecting competition in
            product markets. Comparison with European Union countries
            reveals that, for half of the policy areas covered by the
            study, Romania's product market policies are more
            restrictive of competition than most direct comparators in
            the region, whereas for other indicators Romania is on a par
            with the European Union average or has achieved best
            practice. Nonetheless, these results should be interpreted
            in light of the fact that the Product Market Regulation
            approach measures officially adopted policies and does not
            capture implementation. Future reforms should be directed
            both at improving official regulation and, where policies
            that favor competition are already in place, toward
            effective enforcement.
geo_reg_key: 517208,517190,517191
repnme: repnme: Product market policies in Romania : a
            comparison with EU partners
display_title: Product market policies in Romania :
            a comparison with EU partners
listing_relative_url: /research/2013/11/18502306/product-market-policies-romania-comparison-eu-partners
topicv3: Private Sector Development m1326060 1921,Energy and Extractives m1326595 507,Trade m1326924 698,Power and Electricity Sector m1327094 515,Entrepreneurship m1582903 4424
publishtoextweb_dt: 2013-11-01T00:00:00Z
no_of_pages: 61
author_keys: 0: author_key: 96355
1: author_key: 901956
2: author_key: 1051061
3: author_key: 1184946
4: author_key: 1108197
model_extractions: WPS6698 Policy Research Working Paper 6698

# Product Market Policies in Romania

A Comparison with EU Partners _Donato De Rosa Mariana Iootty Florina Pirlea Arabela Aprahamian Alexandru Stanescu_ The World Bank Europe and Central Asia Region Private and Financial Sector Unit November 2013
Policy Research Working Paper 6698

# **Abstract**

Romania’s European Union accession in 2007 has resulted in a substantial reduction of the formal barriers to integration with the European Union Single Market. This study takes stock of the progress by benchmarking product market policies in Romania to those of European Union countries, as measured by the OECD indicators of Product Market Regulation. These indicators allow for a comprehensive mapping of policies affecting competition in product markets. Comparison with European Union countries reveals that, for half of the policy areas covered by the study, Romania’s product market policies are more restrictive of competition than most direct comparators in the region, whereas for other indicators Romania is on a par with the European Union average or has achieved best practice. Nonetheless, these results should be interpreted in light of the fact that the Product Market Regulation approach measures officially adopted policies and does not capture implementation. Future reforms should be directed both at improving official regulation and, where policies that favor competition are already in place, toward effective enforcement.

This paper is a product of the Private and Financial Sector Unit, Europe and Central Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at dderosa@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
**Product market policies in Romania: A comparison with EU partners**

Donato De Rosa (World Bank, <u>dderosa@worldbank.org)</u> Mariana Iootty (World Bank, <u>miootty@worldbank.org)</u> Florina Pirlea (World Bank, <u>apirlea@worldbank.org)</u> Arabela Aprahamian (World Bank, <u>aaprahamian@worldbank.org)</u> Alexandru Stanescu (World Bank, <u>astanescu@worldbank.org)</u> Key words: Regulation, Competition, Product Markets, European Union, Romania. JEL: K20, K23, L32, L38, L43, L51 Sector Board: Finance and Private Sector
# **ACKNOWLEDGMENTS**

The authors are grateful to Isabell Koske and Isabelle Wanner (OECD Economics Department), who kindly shared the methodology to estimate PMR indicators for Romania and provided helpful comments and suggestions. Helpful suggestions and contributions were received from Martha Licetti and Delia Rodrigo.

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When interpreting the PMR indicators, two caveats need to be considered. The first is that the PMR approach measures officially adopted policies. It does not capture implementation and enforcement. In this regard, interviews with business associations suggest a significant gap between some of the businessfriendly, officially adopted policies, on the one hand, and implementation and enforcement, on the other. Romania has achieved a number of good results in terms of having laws that are more conducive to private sector development. However, the lack of a greater effort in terms of implementation and enforcement can substantially reduce the impact of the policies adopted in recent years which would hurt the competitiveness of the Romanian economy in the longer run. The second caveat is that the current analysis compares Romania in 2011 with OECD and EU countries in 2008 (the most recent year in which a PMR survey was conducted). As most OECD and EU members have actively continued to improve their product markets over the last three or four years, the analysis over-estimates how Romania ranks relative to comparators today.

In the following sections we present a short methodological summary of the PMR indicator, a detailed analysis covering the component indicators of the three main policy areas surveyed: state control, barriers to entrepreneurship, and barriers to trade and investment. The last section concludes and puts forth a number of policy recommendations.

# **2. THE PMR METHODOLOGY**

A regulatory environment propitious to competition in product markets is widely believed to spur GDP growth through two main channels: productivity and employment. Competition in product markets impacts productivity as firms that are faced with vigorous competition have strong incentives to reduce costs, innovate and become more efficient and productive than their rivals. Based on a set of OECD countries and using industry-level data, Nicoletti and Scarpetta (2003) measure the extent to which multifactor productivity (MFP) growth is affected by measures of product market regulation (reflecting the intensity of competition). They find that restrictive regulation in manufacturing tends to reduce MFP growth mainly via the process of technological catch-up. Using a similar approach, Conway et al. (2006) and Arnold, Nicoletti and Scarpetta (2008) find evidence that anti-competitive regulation is harmful particularly for technology-driven productivity improvements in ICT-intensive sectors.<sup>4</sup> Using a different approach, Anos Casero and Udomsaph (2009) analyze micro-level data from ECA countries to estimate total-factor productivity (TFP) and examine how changes in business environment and productivity growth are correlated in the 2001-2004 period. Successful efforts to improve the business environment are found to have a strong impact on firm productivity. By the same token, pro-competitive regulation influences employment growth as reduced barriers to entry curb the market power of incumbents while

> 4 All these studies use the framework proposed by Aghion and Griffith (2005) in which productivity growth in a country/sector depends on the pace with which the country/sector grows in relation to the country/sector leader. In this sense, productivity growth of a lagging country depends on how fast the leader grows and the speed at which the productivity gap is being closed. This, in turn, depends on the policy environment in the follower country/sector, especially with reference to policies that promote firm rivalry and market entry. Apart from this common framework, these three studies have some differences. Arnold, Nicoletti and Scarpetta (2008) use micro-level data and focus on MFP growth. Nicoletti and Scarpetta (2003) also measure MFP but using industry level information, while Conway et al (2006) also rely on industry level data but measuring labor productivity growth. Finally, all these studies rely on the OECD sample of countries.

4
making the entry of competitors possible, which, again, would increase both activity levels and demand for labor.<sup>5</sup> Product market regulation (PMR) is measurable through a methodology developed at the OECD relying on the OECD Regulatory indicators questionnaire. The methodology and key findings of the PMR for OECD countries are presented in Nicoletti et al. (1999), Conway et al. (2005) and Wölfl et al. (2009). The PMR indicators are designed to reflect regulations that have the potential to restrict competition in areas where competition is viable. By construction, they have a number of features which make them useful not only for analysis, but, more importantly, for policy advice, since they allow to pinpoint specific policies that hamper competition in product markets. _First_ , PMR indicators are focused on enacted policies and not on outcomes, implying that they are ‘objective’, in that they are not based on opinion surveys. _Second_ , since the summary PMR indicator is constructed as the average of well-defined components, PMR scores can be related to specific underlying policies, thus providing precise inputs in the phase of policy recommendation. _Third_ , PMR indicators focus on regulatory measures that affect the economy at large and can therefore be considered as comprehensive measures of regulatory restrictiveness. Their advantages notwithstanding, PMR indicators are not designed to capture informal regulatory practices nor the effective enforcement of regulations, since they are only concerned with formal compliance with a number of criteria.

> 5Nicoletti and Scarpetta (2005), Griffith and Harrison (2004), Griffith et al. (2007) provide evidence that easing anticompetitive product market regulation may have a positive effect on employment.

5
**Figure 2: The integrated PMR indicator system**

|State con<br>(0.33|trol<br>)|Product market regulati<br>Barriers to entrepreneurs<br>(0.33)|on<br>hip|Barriers to t<br>investment|rade and<br>(0.33)|
|---|---|---|---|---|---|
|Public<br>ownership<br>(0.50)|Involvement<br>in business<br>operations<br>(0.50)|Regulatory and<br>administrative<br>opacity<br>(0.33)<br>Administrative<br>burdens on<br>start-ups<br>(0.33)|Barriers to<br>competition<br>(0.33)|Explicit barriers<br>to trade and<br>investment<br>(0.50)|Other<br>barriers<br>(0.50)|
|Scope of public<br>enterprise<br>(0.33)<br>Gov’t involvement<br>in network sectors<br>(0.33)|Price<br>controls<br>(0.50)<br>Use of<br>command<br>and control|Licenses and<br>permits system<br>(0.50)<br>Communication<br>and<br>simlification<br>Admin. burdens<br>for corporations<br>(0.33)<br>Admin. burdens<br>for sole<br>proprietor firms<br>(0.33)|Legal barriers<br>(0.25)<br>Antitrust<br>exemptions<br>(0.25)<br>Barriers in<br>network sectors|Barriers to FDI<br>(0.33)<br>Tariffs<br>(0.33)|Regulatory<br>barriers<br>(1.0)|
|Direct control<br>over business<br>enterprises<br>(0.33)|regulation<br>(0.50)|Integration of sectoral information (NM<br>p<br>of rules and<br>procedures<br>(0.50)<br>Sector-specific<br>administrative<br>burdens<br>(0.33)|R+FDI-Index)<br> <br>(0.25)<br>Barriers in<br>services<br>(0.25)|Discriminatory<br>procedures<br>(0.33)||

<!-- Start of picture text --> Gov’t involvement<br>in network sectors<br>(0.33)<br><!-- End of picture text --> <!-- Start of picture text --> Regulatory<br>barriers<br>(1.0)<br><!-- End of picture text --> <!-- Start of picture text --> Integration of sectoral information (NMR+FDI-Index)<br><!-- End of picture text --> Source: OECD 2008 The structure of the PMR system is shown in Figure 2. The system is composed of 18 basic or ‘low-level’ indicators, each capturing a specific aspect of the regulatory regime as described in Box 1. The indicators are calculated on the basis of the qualitative and quantitative information obtained from questionnaire answers. Qualitative data are assigned a numerical value that allows ordering each of the possible responses to a given question. Quantitative information is ranked by subdividing it into categories based on a system of thresholds. The coded information is then normalized over a scale of zero to six. These data are then aggregated into basic or ‘low-level’ indicators by assigning subjective weights to the various regulatory requirements. Given the normalization of the basic data, all the low-level indicators also have a scale of zero to six, reflecting increasing restrictiveness of regulatory areas. A detailed description of the low level indicators is presented in Annex III.

Basic indicators are then aggregated into broader regulatory domains. Higher level indicators are calculated as weighted averages of their constituent lower level indicators. The attribution of lower-level indicators to each higher-level indicator, and the weights used in the aggregation, are based on principal component analysis (Nicoletti et al., 1999). At the highest level of aggregation the overall indicator of product market regulation summarizes the restrictiveness of the regulatory framework in the product market. The structure of the PMR system, with progressive levels of aggregation, has the advantage of allowing a decomposition of higher-level indicators, with an increasing degree of detail, into the values of the more disaggregated indicators, each corresponding to specific regulatory provision.

6
# **<mark>Box 1: The 18 low-level PMR indicators</mark>**

<mark>The domain</mark> **<mark>State control</mark>** <mark>reflects the extent to which governments influence firm decisions through public ownership, price controls or other forms of coercive – instead of incentive-based – regulation. This consists of:</mark>

- **_<mark>Scope of public enterprises</mark>_** <mark>: measures the pervasiveness of state ownership across business sectors as the proportion of sectors in which the state controls at least one firm.</mark>

- **_<mark>Government involvement in network sectors</mark>_** <mark>: measures the extent of public ownership in the energy, communications and transport sectors.</mark>

- **_<mark>Direct control over business enterprises</mark>_** <mark>: measures the existence of government special voting rights in privately-owned firms, constraints on the sale of state-owned equity stakes, and the extent to which legislative bodies control the strategic choices of public enterprises (for OECD and accession countries this is based on more disaggregated data as compared to other non-member countries).</mark>

- **_<mark>Price controls</mark>_** <mark>: reflects the extent of price controls in competitive sectors, such as air travel, retail trade, road freight, professional services, and mobile communications.</mark>

- **_<mark>Use of command and control regulation:</mark>_** <mark>indicates the extent to which government uses coercive (as opposed to incentive-based) regulation in general and in specific service sectors.</mark>

<mark>The domain</mark> **<mark>Barriers to entrepreneurship</mark>** <mark>reflects obstacles to easy access to information on existing regulation, general or sector-specific administrative burdens for business start-ups and other general or sector-specific regulations that hinder entry of firms. It consists of:</mark>

- **_<mark>Licenses and permits systems:</mark>_** <mark>reflects the use of „one-stop shops‟ and „silence is consent‟ rules for getting information on and issuing licenses and permits.</mark>

- **_<mark>Communication and simplification of rules and procedures:</mark>_** <mark>reflects aspects of government’s communication strategy and efforts to reduce and simplify the administrative burden of interacting with government.</mark>

- **_<mark>Administrative burdens for corporations:</mark>_** <mark>measures the extent of administrative burdens on the creation of corporations.</mark>

- **_<mark>Administrative burdens for sole proprietors:</mark>_** <mark>measures the extent of administrative burdens on the creation of sole proprietor firms.</mark>

- **_<mark>Sector-specific administrative burdens:</mark>_** <mark>reflects administrative burdens in the road transport and retail distribution sectors.</mark>

- **_<mark>Legal barriers:</mark>_** <mark>measures the pervasiveness of barriers to entry across business sectors as the proportion of sectors in which there are explicit legal limitations on the number of competitors.</mark>

- **_<mark>Antitrust exemptions:</mark>_** <mark>measures the scope of exemptions to competition law for public enterprises</mark> _<mark>.</mark>_

- **_<mark>Barriers to entry in network sectors:</mark>_** <mark>measures various kinds of entry barriers in network sectors, as well as the degree of vertical integration in energy, rail transport and telecommunication sector.</mark>

- **_<mark>Barriers to entry in services:</mark>_** <mark>measures barriers to entry in retail trade and professional services.</mark>

<mark>The domain</mark> **<mark>Barriers to trade and investment</mark>** <mark>captures barriers to foreign ownership of firms, tariffs and other non-tariff barriers to trade. It consists of:</mark>

- **_<mark>Barriers to foreign direct investment (FDI):</mark>_** <mark>measures general and sector-specific restrictions on foreign acquisition of equity in public and private firms, obligatory screening procedures and operational controls for affiliates of foreign firms (e.g. nationality requirement for key personnel). For OECD and accession countries, sector-specific barriers to FDI are measured by the FDI restrictiveness index.</mark>

- **_<mark>Tariffs:</mark>_** <mark>reflects the average of most-favored-nation tariffs, computed from detailed product data on tariffs. For OECD countries, tariffs are computed based on more detailed data and more elaborated aggregation as compared to non-member countries.</mark>

- **_<mark>Discriminatory procedures:</mark>_** <mark>reflects the extent of discrimination against foreign firms at the procedural level.</mark>

- **_<mark>Regulatory barriers:</mark>_** <mark>reflects other non-tariff barriers to trade, such as mutual recognition agreements or international harmonization.</mark>

_<mark>Source: Wölfl et al. 2009</mark>_ 7
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**<mark>Box 2: Privatization and Governance of State-Owned Enterprises: Recent Developments</mark>**<sup>~~11~~</sup>

<mark>According to the 2009 Memorandum of Understanding between the government of Romania, the International Monetary Fund, the World Bank, and the European Union, the authorities have agreed to a comprehensive privatization agenda which includes the sale of majority and minority stakes in a number of large SOEs. As of December 2011, the following companies were listed for planned sales of majority government shares</mark><sup>12</sup> <mark>:</mark>

- <mark>Oltchim (chemical products); Cuprumin (extractive industry); CFR Marfa (the national cargo rail company); ElectricaServ, SC ElectricaFurnizare SA and subsidiaries, Hunedoara,  ElectrocentraleBucuresti</mark> (major energy producers and suppliers);

<mark>In addition, auctions of minority stakes are envisioned for:</mark>

- <mark>Tarom (national airline company); Transelectrica, Hidrolectrica, Nuclearelectrica, Romgaz and Transgaz</mark> (major energy companies); Posta Romana (national post – basic letter services); and Petrom.

**<mark>Corporate governance:</mark>** <mark>Romania adopted a new law on corporate governance in November 2011. The new regulations require:</mark>

- <mark>Regular independent external audits;</mark>

<mark>- Quarterly publication of financial data;</mark> <mark>- Reinforcement of OECD principles on corporate governance and the rights of minority shareholders;</mark> <mark>- Suitable qualifications for management and board members of state-owned enterprises.</mark> <mark>As noted in recent analysis by the IMF (January, 2012), diligent application of the law will be instrumental in the privatization process, particularly for listings of minority stakes, where investors could be concerned with of the lack of corporate governance standards in SOEs, and the potential for abuse of minority shareholder rights. The government agreed to undertake a number of measures to improve the performance of SOEs under monitoring.</mark><sup>13</sup>

# **3.1.2. STATE INVOLVEMENT IN BUSINESS OPERATION**

The indicator for ‘state involvement in business operations’ captures both the existence of price controls and the use of “command and control”, as opposed to incentive-based regulation. The use of **_price controls_** has substantially decreased since the first decade of transition (World Bank 2004). However, some prices remain under government control. Retail prices for tobacco and pharmaceuticals are controlled, as well as prices of network sectors, including those for gas, water, and passenger urban and rail transport (Romanian Competition Council, 2010). Particularly in the energy sector, tariffs are set below market levels by the energy regulator (ANRE) for both individual and industrial consumers. As part of a recent program with the IMF and the EC, the government of Romania has committed to a gradual deregulation of prices in order to attract private investment, which is required to revamp the

> 11 IMF( January 2012)

> 12 As of February 2012 four SOEs were listed for privatization offers by end-April 2012: Oltchim, Transelectrica, Transgaz and Cuprumin (IMF, April 2012). According to most recent information, a majority offering for Oltchim is scheduled for May 31, 2012. Shares in Transelectrica were placed on offer on March 14, 2012. The sale of a minority stake in Transgaz is due to start at the end of June 2012. Negotiations over the sale of Cuprumin were ongoing as of April 2012.

> 13 IMF (April, 2012)

12
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## **<mark>Box 3: What the PMR survey means by “command and control” regulation</mark>**

The contrasting use of “command-and-control” and “incentive-based” regulation appear to have been brought into <mark>common usage by Schultze who wrote in a 1977 lecture about economic efficiency: “We tend to see only one way of intervening – namely removing a set of decision from the decentralized and incentive-oriented private market and transferring them to the command-and-control techniques of government bureaucracy” (page 6)</mark> In this context, the PMR attempts to measure the extent to which the cost of new regulation is assessed, and whether <mark>alternatives are considered before implementing new regulations. About half of the indicator weights are allocated to the following two questions:</mark>

**Regulators are required to assess alternative policy instruments (regulatory and non-regulatory) before** **<mark>adopting new regulation. (Current answer: yes).</mark>**

**Explanation.** The use of a wide range of mechanisms for meeting policy goals, not just traditional regulatory <mark>controls, helps to ensure that the most efficient and effective approaches are used. Approaches may include green taxes and subsidies, voluntary agreements, information programs such as eco labeling, self-regulation, permittrading schemes, and performance-based regulation (where a sector or industry must comply with a standard but can broadly choose how to meet it).  Note that the question only refers to whether the obligation exists as a specific provision in a specific legislative act, not whether the spirit of it is in fact respected.   A positive answer to the question would require the existence of a normative act explicitly ruling out regulation as the default option</mark>

## **Guidance has been issued on using alternatives to traditional regulation. (Current answer: no).**

**Explanation.** The regulatory process is governed by a standard procedure, outlining the steps to be taken to issue <mark>new regulation. For instance, the procedure may include binding ex ante regulatory impact assessment (RIA).</mark>

# **3.2 BARRIERS TO ENTREPRENEURSHIP**

The second regulatory domain covered by the PMR is ‘barriers to entrepreneurship’ which measures administrative transparency and government’s efforts simplify its communication with the public, administrative burdens for new firms at the economy-wide and industry level, and barriers to entry in specific sectors. Since the beginning of the transition period, Romania has made significant progress in reducing legal barriers to entrepreneurship, thus placing the country in a good position in terms of official regulation relatively to its European peers (Figure 11). For example, since 2001 the government has adopted an annual action plan to remove regulatory barriers for businesses, which led to a significant decrease in transaction costs for firm entry and operation. A great impetus for these reforms was the prospect of EU adherence. In 2007, the year of Romania’s accession, the country was classified by Doing Business as the second most active reformer.<sup>19</sup> However, progress has stalled in recent years. The implementation of the simplification agenda has been negatively impacted by a lack of institutional coherence and political support (World Bank, 2011). In 2012 Romania achieves the 72nd place for overall ease of doing business, down from 65th in 2011.

> 19 News release: “Doing Business 2007: Eastern European economies lead worldwide momentum for regulatory reform” (International Finance Corporation and World Bank, September 6, 2006).

14
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5).

# **<mark>Box 5:  Challenges for Competition Policy in the Electricity Market</mark>**

Starting in the late 90s Romania conducted a series of significant reforms in the electricity sector in preparation for <mark>the entry into the EU. The reforms were designed to break up the state-owned vertically integrated utility, to separate sectors that are characterized as natural monopolies (transmission, distribution) from potentially competitive areas (generation, supply), to reduce the ownership and involvement of the state, and to create competitive wholesale and retail markets. An independent energy regulator ANRE was established. The reforms were expected to improve sector governance and to attract much needed private investments into the sector. However, the pace of the reforms slowed down even before the country joined the EU. In the recent years the</mark> government even considered the plan to return to the old model of vertically integrated national champions.

<mark>The current state of the electricity market in Romania is characterized by a high degree of state involvement. The government owns the major electricity generators and the majority of electricity distribution (Nutu, 2010). Transmission operator (Transelectrica) remains independent from generation to ensure non-discriminatory access for third parties. There are many suppliers at the retail market - 55 suppliers were active in 2010, of which 7 were</mark> default suppliers (3 state-owned and 4 with majority of private ownership) (ANRE, 2011).

<mark>There are several major components of the wholesale market in Romania. Wholesale markets are the markets where suppliers buy from generation companies or from other suppliers. The majority of the energy is traded through longterm bilateral contracts that are either regulated or concluded through the negotiation process. The regulated contracts are the contracts between generators and suppliers to serve the captive retail customers. The prices and</mark> volumes of the regulated contracts are established by ANRE.

<mark>A series of scandals at the wholesale market that took place in 2002-2004 and in the recent years serve as an indication of the existing problems. The scandals were regarding the contracts signed by state-owned producers and certain electricity traders, industrial clients and electricity producers (so-called “smart guys”) to buy or sell at the preferential prices (below or above market-level prices). In April 2012 the European Commission opened five indepth investigations to examine the contracts of state-owned Hidroelectrica. The investigations were opened on the grounds that preferential prices represent indirect subsidies that might breach EU state aid rules. According to the EU Commission, there are indications that the state might have played a role in the decisions of the utility regarding</mark> the investigated contracts.

<mark>Ensuring the absence of preferential treatment in the electricity contracts will improve not only the competition</mark> situation at the electricity market, but also in the other affected sectors of the economy.

On the other hand Romania fares worse than the EU average in terms of **_barriers to entry in services_** . The main area where Romanian law is more restrictive than that of its peers is ‘retail distribution’.

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<mark>certain service quality with the loss in consumer welfare. For example, the existing deontological code governing the notary profession (art. 28, section j) considers that opening a notary office in the close proximity (in the same building or within a distance of 50 meters) of an existing notary office is anticompetitive especially without notifying the latter. Another discriminatory practice stems from the fact that certain notary offices only provide high priced services, while other services with a lower value are provided by other offices. Other restrictions are related to the obligation for a newly authorized professional service provider to undertake an internship period and be supervised by a senior member of the profession. This further entails distortions associated with: (i) discriminatory treatment of among interns based on gender; (ii) lengthy internship period, in addition to low level of remuneration; and (iii) limitations on the maximum number of interns supervised by senior experts. In this context, the existence of excessive restrictions to entry may limit competition in the market among professional service providers, leading to higher tariffs and limited choice for consumers. The RCC advocated for and intervened to eliminate of existing quantitative restrictions in many cases, such as pharmacies, dentists and notaries, but has been less active regarding</mark> the obligation of membership to an association in these cases.

<mark>The restriction on ownership is another barrier to entry that also restrains access to capital for professional service providers. Although for certain professions regulation of business activity may be justified to protect the independence and the ethical standards of the service providers, it is preferable to ensure such principles through less distortionary mechanisms. Other barriers to service provision may involve: (i) setting mandatory or recommended minimum or maximum fees by the professional bodies in charge of regulation; (ii) advertising</mark> restrictions; and (iii) restrictions on creating associations of professional service bodies.

# **3.3 BARRIERS TO TRADE AND INVESTMENT**

Observance and implementation of the rules for membership of the World Trade Organization (WTO) and, even more strongly, the European Union (EU), have led to a significant reduction of barriers to trade and investment in Romania over the last two decades. Romania’s foreign trade policy has been driven most of all by the commitments of the EU Eastern Enlargement project, promoting bilateral trade liberalization initially with the EU and EFTA and, subsequently, with other preferential partners of the EU. The Pan-European Agreement on the Cumulation of the Rules of Origin, combined with the gradual removal of tariffs on all industrial products by January 2002,<sup>25</sup> as well as the harmonization of technical standards, led to Romania’s participation in a de facto free trade area for industrial products (World Bank, 2004). The removal of tariffs on agricultural and agro-processed goods, in January 2007, as Romania joined the Common Agricultural Policy (CAP), completed the liberalization of trade with the EU.

> 25 As prescribed by the European Association Agreement between the EU and Romania, signed in 1993.

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# **<mark>Box 7. Alternative Regulatory approaches</mark>**

**<mark>Performance-Based Regulations—</mark>** <mark>specify required outcomes or objectives rather than the means by which they must be achieved.  Thus firms and individuals can choose processes that are more efficient and less costly, which promotes the use of new technology on a broader scale.  Such type of regulation is increasingly used in health, safety, consumer protection, and environmental regulation.  Drawbacks include measurement problems related to desired outcomes, higher administrative and monitoring costs, greater responsibilities for small companies to develop appropriate compliance strategies.  Most countries have resorted to the use of guidelines or “safe harbors” in conjunction with performance-based regulation.  Guidelines provide information on appropriate compliance strategies, while safe harbors allow the benefits of certainty of compliance associated with prescriptive regulation to be attained, while also allowing more innovative firms to take advantage of the benefits of such regulation.</mark>

**<mark>Process Based Regulations</mark>** <mark>—require businesses to develop processes that systematically control and minimize production risks. These processes are used in businesses with multiple and complex sources of risk, where ex post testing of the product is either ineffective or expensive.  Process based regulation is predominantly used in health, food safety, and environmental regulation.</mark>

**<mark>Co-regulation—</mark>** <mark>businesses take the lead in regulation through endorsement and adherence to codes of practice. This type of regulation is highly cost effective for the government.  Drawbacks include the possibility for encouraging anti-competitive activities by business or professional organizations.</mark>

**<mark>Economic Instruments -</mark>** <mark>taxes, subsidies, tradable permits, vouchers and the like.  Economic instruments allow businesses to achieve regulatory goals in the least costly manner and provide market incentives which reward the use of innovation and technical change.</mark>

**<mark>Information and Education—</mark>** <mark>most widely used approach to regulation in OECD member states; empower consumers to adopt actions or make informed choices to change their behavior.  Examples include campaigns aimed at reducing speeding when driving, anti-litter behaviors; reducing the use of drinking water; eco-labeling of products.</mark>

**<mark>Guidelines</mark>** <mark>—issued by regulatory authorities, setting out processing or providing interpretations to aid understanding of government objectives by businesses and citizens.  Guidelines may accompany existing regulations, but also are increasingly used as stand-alone documents.  Guidelines, for example, are widely used in the area of consumer protection in Denmark.</mark>

**<mark>Voluntary Approaches</mark>** <mark>—initiated by industries, sometimes formally sanctioned or endorsed by government. They include voluntary initiatives, voluntary codes, voluntary agreements, and self-regulation.  An example of a voluntary arrangement is the chemical industry’s Responsible Care Program, used in 40 countries, which promotes the adoption of rules for sound environmental management practice.</mark>

<mark>_____________</mark> _<mark>Source</mark>_ <mark>: OECD 2002.</mark> Removing legal constraints to the share of stakes that can be acquired by foreign investors in network companies (a practice followed by many EU and OECD countries) would eliminate the remaining barriers to FDI.

High barriers to entry in services are pervasive throughout the European Union, as the PMR survey indicates (although in some countries, such as the UK, the market for services is considerably more liberalized than the EU average). Like the infrastructure sectors, professional and other services provide supply inputs to a large number of firms in the economy. When the providers of these inputs are not subjected to competitive pressures (because the requirements for entry are highly onerous) this may result 27
in expensive, low-quality services. Because these are upstream markets this, in turn, could make a large number of local companies less competitive domestically and internationally.

Unfortunately, in Romania the barriers to entry in services appear even higher than the EU average. A major challenge is to implement the EU Services Directive, adopted in 2006, which aims to eliminate obstacles to services provision in the EU internal market by establishing two fundamental freedoms: free establishment for service providers, and free movement of services between Member States. The Directive aims to improve the basis for economic growth and employment by abating barriers to cross border trade in services. The core of the provisions intended to eliminate obstacles to the free movement of services is the Country of Origin Principle (CoOP). This makes it easier for service providers to establish themselves, offer services in other Member States without unnecessary regulation and bureaucracy, and provide services temporarily and/or at a distance based on the rules in the country in which they are established. The Directive applies to services supplied by providers established in all Member States (e.g. business services as advertisement, estate agents, IT consultancy, management consultancy, legal services, computer services; construction services as commercial construction building services, industrial cleaning; hotels and restaurants, local services, etc.). However, it does not cover financial services, electronic communication services, audiovisual services, services in the field of transport, services of temporary work agencies, healthcare agencies publicly or privately financed.

While it is imperative that Romania continues to improve on rules and legislation governing product market regulations, an equally important challenge has to do with improving practices. A series of prerequisites is necessary to improve the effectiveness of application and enforcement of regulation which will increase the long run competitiveness of the Romanian economy. A recent Functional Review of the Business Environment in Romania (WB, 2011) outlines a number of actions that can be taken to improve the institutional framework. These include:

- **Political commitment at the highest level.** Ensuring political support from the highest level of government is crucial to generate consensus for reform both within and outside public administration. This could be achieved through the establishment of an official advisory body, chaired by the Prime Minister, to define priorities for administrative simplification based on a unified, ‘whole-of-government’ approach to regulatory reform;

- **Redesign of the institutional set-up for regulatory reform** .  Political support should be reflected in the reorganization of the institutional architecture of government with the objective of improving the coordination and cooperation among implementing agencies and the oversight of the overall regulatory process.  The responsibilities of the unit in charge of regulatory reform should be carefully reviewed and prioritized and the necessary resources allocated to it;

- **Expand the use of regulatory tools** . The use of regulatory tools and impact assessments (such as RIA) should be better explained and expanded. Consultations with the business community should be conducted in a on a regular basis and in a timely manner, before new legislation is enacted. The input of the private sector should be taken into account, to help legislators remove the regulations that are most cumbersome for firm entry and operation.

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