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Competition Developments in

Key Sectors

Bucharest - 2014

COMPETITION COUNCIL

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TABLE OF CONTENTS

FOREWORD ............................................................................................................................................. 5

1. INTRODUCTION ............................................................................................................................... 7

1.1. The Evolution of the National Economy ................................................................................. 7

1.2. The Evolution of the Competition Policy .............................................................................. 10

2. COMPETITION POLICY AND THE REFORM OF LEGAL FRAMEWORK IN KEY ECONOMIC SECTORS.

INCREASE OF EFFICIENCY THROUGH PREVENTION AND ELIMINATION OF RENTS .............................. 15

3. THE AGGREGATE INDEX OF COMPETITIVE PRESSURE .................................................................. 21

3.1. Introductory elements .......................................................................................................... 21

3.2. Changes from the previous version ...................................................................................... 22

3.3. Application on 21 Industries in the national economy ......................................................... 26

3.4. A further step in the AICP analysis ........................................................................................ 29

3.5. Conclusions ........................................................................................................................... 30

4. THE LIFE INSURANCE SECTOR ....................................................................................................... 32

4.1. Introduction .......................................................................................................................... 32

4.2. Recent developments in the life insurance sector in Romania ............................................ 34

4.3. Comparisons with other European states ............................................................................ 38

4.4. Stability and performance indicators in the Romanian life insurance sector ....................... 43

4.5. Life insurances in Romania from a competition perspective ............................................... 47

4.6. The assessment of the life insurance sector through the Aggregate Index of Competitive

Pressure ............................................................................................................................................ 53

4.7. Conclusions ........................................................................................................................... 54

5. THE BANKING SECTOR .................................................................................................................. 55

5.1. An insight into the sector ...................................................................................................... 55

5.2. The crediting activity ............................................................................................................. 56

5.3. Bank fees ............................................................................................................................... 61

5.4. National and communitary initiatives concerning inter-bank fees ...................................... 65

5.5. Conclusions ........................................................................................................................... 69

6. THE MOBILE TELECOM SECTOR .................................................................................................... 70

6.1. The mobile telecom sector in Romania ................................................................................ 71

6.2. The evolution of inter-connection charges ........................................................................... 77

6.3. Number portability ............................................................................................................... 79

6.4. The activity of the Competition Council in the mobile telecom area ................................... 80

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6.5. The Effects of the Implementation of Commitments Concerning the Distribution of Mobile

Phone Pre-paid Products .................................................................................................................. 84

6.6. The Assessment of the Mobile Telecom Sector through the Aggregate Index of Competitive

Pressure ............................................................................................................................................ 88

6.7. Conclusions ........................................................................................................................... 88

7. THE RENEWABLE ENERGY SECTOR ............................................................................................... 89

7.1. The Importance and Evolution of the System to Promote the Production of Energy from

Renewable Sources ........................................................................................................................... 89

7.2. The Aid Mechanism............................................................................................................... 90

7.3. The green certificates market ............................................................................................... 95

7.4. Conclusions ......................................................................................................................... 103

8. STATE AID GRANTED TO SERVICES OF GENERAL PUBLIC INTEREST – HEAT PRODUCTION,

TRANSPORTATION, DISTRIBUTION AND SUPPLY BETWEEN 2007 AND 2013 ..................................... 105

8.1. The public heat supply service in Romania ......................................................................... 105

8.2. The economic-financial situation of heat producing undertakings which were granted the

heat production, transport, supply and distribution activity ......................................................... 107

8.3. Production costs of undertakings operating in the area of heat production, transport,

distribution and supply, between 2007 and 2013 .......................................................................... 109

8.4. Heat production price ......................................................................................................... 110

8.5. State aid/compensations received by heat-producing companies .................................... 112

8.6. The contribution of undertakings operating in the area of heat production, transport,

distribution and supply, to the state budget, social insurance budget, unemployment budget and

local public authorities budget, between 2007 and 2013 .............................................................. 118

8.7. The main problems identified in the functioning of the centralized heat supply system in

Romania .......................................................................................................................................... 119

8.8. Measures which could improve the functioning of the urban heating system in Romania

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FOREWORD

The report on competition developments in key sectors of the

Romanian economy, which has reached the 6th edition this year,

represents an important endeavor to promote the competition

policy and disseminate the Competition Council’s analysis tools,

and it is complementary to the Annual activity report of our

institution. The report will be publicly launched in the annual

autumn conference, an event which has become an opportunity

for debate on current topics from a competition perspective.

This year, the Report focuses on regulated areas, in the context

of launching the project conducted together with the

Organization for Economic Co-operation and Development (OECD) in partnership with the

Chancellery of the Prime Minister of Romania and the Ministry of Public Finances, a project

whereby the impact of regulations in force in key sectors of the Romanian economy is

assessed. The sectors selected for evaluation are food processing (including collection),

transports (road and naval freight transport) and constructions (mainly, building materials

for civil constructions and secondary, expropriations and cadastre). The fact that OECD

experts will work together with the experts of the Competition Council will lead to building

up the capacity of the national competition authority to apply models for assessing the

impact of regulations.

Recently, the domestic business environment has undergone a resettlement period, the

favorable national and international macroeconomic conditions generating the perspective

of an economic re-launch on the medium-run. Even though the effects of the economic

crisis can still be felt at international level, almost six years after the crisis started, Romania’s

economy has entered a positive trend sustained by the deflation process, the increase of

exports and the reduction of deficits. There are still, however, some factors, which render

this recovery process difficult and make it hard to eliminate the gaps between Romania and

Western economies. Alongside the re-launch of loan-granting, the need for structural

reforms represents a priority for decision-makers and the competition authority plays a

pivotal role in the elimination of barriers for businesses and the increase of competitiveness

in key sectors.

In this year’s report, we resumed the assessment of competitive pressure based on

indicators, both from the perspective of conducting comparative analyses and the

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perspective of increasing the accuracy of the analysis model. Furthermore, the report

broadly presents the evolution of sectors with a direct impact on consumers and the general

economic environment: banking, telecom, life insurance, renewable energy and heat.

The central topic of this year’s report, i.e. structural reforms in key sectors, represents, at

the same time, a priority objective of the Competition Council and the measures proposed

in these analyses could bring significant benefits both to Romanian consumers and the

Romanian economy, as a whole.

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2011 2012 2013 2014

%

1. INTRODUCTION

1.1. The Evolution of the National Economy

The International Economic and Financial Context

The global economy continues its recovery process at a moderate pace. Even though the

favorable evolution of advanced economies has had a positive influence on the global

perspective, the global economic growth continues to be moderate and uneven between

different regions. The increase of commercial exchanges remains slow, while the conditions

on the labor market in main advanced economies are gradually improving.

Figure 1.1. Real GDP growth, world level, 2011-2014

(quarter-on-quarter data)

Source: OCDE

Monetary conditions have remained favorable to a large extent in advanced economies,

while many emerging economies faced a tightening of such conditions, the modifications

mainly reflecting changes in external funding, as well as monetary policy rate increases.

In the European Union, after a period of economic recovery of low intensity, which took

different forms in the Member States, the economic perspective improved, even at the level

of more vulnerable states.

In 2013, the European Union emerged from recession, with increases of the real GDP in the

last three quarters of the year. As concerns the Member States, more than half of them had

a positive economic growth last year.

Considering the positive trend encountered in more and more Member States, given the

strengthening of domestic demand, it is expected that the European Union gross domestic

product will continue to increase, which has been confirmed by the positive trend in the

first three quarters of this year. As the effects of the economic and financial crises phase

out, the economic growth is increasingly stimulated by the domestic demand and less by net

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exports, even though the former continue to represent the engine of growth in vulnerable

Member States.

Figure 1.2. Real GDP growth in the European Union Member States, 2013

Source: Eurostat

However, economic growth continues to be affected by large public and private debts, by

financial fragmentation and uncertainty, hence the expectations regarding the time frame in

which the European Union GDP will reach the pre-crisis level remain pessimistic.

Both external factors, as well as the decrease in raw material prices and the increasing euro

exchange rates, as well as internal factors, such as the fragile business environment, the

economic contraction of some Member States and the completion of the temporary

increase of taxes and managed prices, have determined inflation in the European Union and

the Euro area to reach constantly decreasing levels. This trend highlighted the risks

associated with extremely low inflation rates: higher real interest rates, increased public and

private debt burden and reduction in demand and production.

Figure 1.3. Evolution of the annual inflation rate in the European Union and the Euro area

Source: Eurostat

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Figure 1.5. Inflation evolution

-1

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1,5

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2012 2013 2014

%

Domestic Macroeconomic Trends

The Romanian economy exceeded the growth expectations in 2013, with a real GDP growth

rate of 3.5%, the second biggest growth among EU Member States. This result was mainly

determined by the robust industrial production and the rich agriculture yield.

Figure 1.4. Real GDP growth in Romania (quarter-on-quarter data)

Source: National Institute of Statistics

Quarterly data indicate a favorable gross domestic product trend from one quarter to

another since the beginning of 2013 until present. The exception is the second quarter of

2014, when the GDP decreased, in real terms, by 0.3% compared to previous quarter.

Subsequent to circumstantial

influences (high vegetable

demand, decrease of managed

tariffs and the appreciation of the

national currency against the

euro), the annual inflation rate has

had a significantly declining trend.

The deflation process has led to

successive decisions to reduce the

monetary policy interest rate.

Since the beginning of the year

and until October 2014, the

National Bank of Romania made

four such decisions, bringing the

interest rate to 3.00%.

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7

%

Figure 1.6. Evolution of the monetary policy interest rate

Source: The National Bank of Romania

The budget deficit decreased from -2.9% of the GDP in 2012, to -2.5% in 2013 and Romania

met the target established as a budget policy objective for the current year.

1.2. The Evolution of the Competition Policy

At global level, the economic situation is gradually improving, as the effects of the economic

and financial crisis are diminishing. For the following years, the international financial

institutions foresee a consolidation of economic growth and commerce at a moderate, but

steady pace.

In this context, the measures aiming at the development of growth potential of economies

worldwide are essential. The efficiency of competition policy is positively associated with

sustainable economic growth, considering the impact that, through specific mechanisms,

the activity of competition authorities has on the increase on productivity.

As for Romania, the concern for the implementation of competition-oriented reforms is

high. The international institutions have noticed the efforts made by Romania to strengthen

competition and the associated legal framework, as key elements for the improvement of

national competitiveness and economic performance.

In 2014, the Organization for Economic Co-operation and Development (OECD) assessed the

development and implementation of competition policy in Romania1 and the report findings

showed that Romania has a competition regime in line with international standards and

practice. This situation comes as a result of the permanent concern of the Competition

Council to improve the efficiency of competition policy enforcement and the capacity of the

institution to improve market functioning.

1 The analysis was primarily focused on the Competition Council activity of the last three years.

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Competition policy in Romania has strong roots in the community enforcement standards.

As a consequence, but also due to the interest for improving the institutional and law

enforcement framework, one can notice a series of actions of the Competition Council

regarding the analysis and the legal framework (laws, secondary legislation, procedures

etc.).

One of the strategic initiatives of the Council for increasing the performance refers to the

consolidation of internal expertise on economic analysis.

Established in 2012, as part of the Research and Synthesis Directorate, the Economic

Analysis Group has played an increasingly active role in recent activity of the competition

authority.

Through the creation and consolidation of this group, the intention of the Council was to

answer the need for highly complex economic analysis and to ensure a tool for the

evaluation of economic aspects for on-going cases.

The support for carrying out complex analyses implies early involvement in case handling, as

well as guidance and methodological support for team members. Beyond such involvement,

the Economic Analysis Group can also target punctual situations, assessing the economic

reasoning used by competition inspectors in specific cases or the assessment of analysis

submitted by companies.

Within the first ten months of 2014, the team answered more than 20 such requests,

exceeding, during this period, the number of requests corresponding to the entire previous

year. The support of the Economic Analysis Group focused on different aspects, including:

defining relevant markets using quantitative methods;

analyzing unilateral effects of horizontal mergers;

analyzing incapacity to pay requests submitted by companies asking for fine reduction;

supporting court defenses using economic arguments;

evaluating economic analyses submitted by companies in court;

carrying out ex-post analyses etc.

Furthermore, the team has played an active role in the evaluation process of investigation

reports from the economic perspective and it was involved in formulating opinions on

legislative changes with potential anti-competitive impact.

The role of economists and economic analysis has increased among competition authorities,

as well as among companies entering into contact with the institution. Thus, we notice that

more and more companies use the economic arguments when submitting documents to the

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Council or to courts. The issue is broad, and its complexity increases over time. Given this

trend, the Economic Analysis Group from the Research and Synthesis Directorate seeks to

answer specific needs of economic knowledge, which it tries to anticipate. To this regard,

the team develops methodologies and organizes courses, seminars and internal

presentations, through which it shares expertise on certain topics of interest with other

competition inspectors.

As concerns the effort of the Competition Council to improve the legal framework, this

took the form of a series of amendments in various areas: laws, secondary legislation,

procedures etc. The main amendments brought to the legal framework in 2014 are

presented below.

Government Ordinance no. 12/2014, published in the Official Journal of Romania (no. 586,

August 6, 2014), amended and supplemented Law no. 11/1991 combating unfair

competition.

The amendment and supplementing of this law started in the second part of 2011, when

several versions of the amendment draft were issued, debated with World Bank experts,

public authorities and institutions, business environment and academics.

Being approved by the Competition Council Plenum in May 2014, the draft law, later

converted into a draft ordinance, underwent various changes. These changes were the

result of constitutional constraints, as well as of comments submitted during the approval

procedure, especially those provided by the Ministry of Justice. The draft ordinance was

approved during the Government meeting of July 31st, 2014.

The amendments and completions of Law no. 11/1991 concern the following aspects:

Formulating a framework-definition of unfair competition and separating the competences of public authorities and institutions with attributions in the field;

Upgrading the legal text, by defining some concepts in accordance with the phrasing used at Community level;

Strengthening the law goal of ensuring fair competition and abolishing the obligation of applying fines in all cases of law infringement;

Exempting the competition authority from liability in minor cases and focusing on major cases;

Establishing the competencies of the Competition Council Plenum and the ones of competition inspectors:

Discouraging undertakings and public authorities/institutions from blocking availability of the data and information the competition authority needs in order to solve complaints;

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Entering the attribution of monitoring decisions issued by the competition authority through which measures to stop/to prohibit unfair commercial practices were imposed;

Facilitating the procedure for solving complaints;

Strengthening the role of the Competition Council in combating unfair competition;

Eliminating the disproportionality of fines applied to individual and legal entities;

Providing legal practice in the field;

Ensuring a transparent process, capable to discourage other undertakings from committing unfair competition practices;

Ensuring the definition and implementation of public policies in combating unfair competition by establishing the Inter-institutional Council on combating unfair competition.

The changes in the legal text on unfair competition had procedural implications. It became

necessary to adopt a new Regulation establishing a procedure for solving complaints related

to unfair commercial practices. The main aspects considered in drafting the new regulation

are: detailing the criteria against which to determine the effects of unfair competition

practices and the practical way of dealing with complaints.

The same Ordinance that brought amendments and completions to Law no. 11/1991, also

brought a series of changes to the Competition Law no. 21/1996, republished.

These changes mainly aim at increasing efficiency of processes, procedures and use of the

competition authority human resources and they refer to: the assimilation of the

Competition Council members at state secretary level, changing the quorum for meetings

and adoption of decisions in the Competition Council Plenum, giving the Competition

Council the possibility to prioritize cases (depending on the potential impact on effective

competition, the general interest of consumers and the strategic importance of the

economic sector), specific regulation for closing ex officio investigations and informing the

parties, regulating the access to investigation case file investigation, eliminating the tariffs

charged for delivering copies or excerpts of investigation files2 and repealing the provision

that allowed suspension of the Competition Council’s procedure in case of appealing the

order that denied access to confidential information from the investigation case file.

Within the Operational Programme Administrative Capacity Development financed by the

European Social Fund during 2007-2013, the project Improving the efficiency of competition

policy enforcement in conjunction with sectoral policies was carried out, one of its

components consisting of Reviewing the legal framework governing market competition.

2 This measure is part of the governing programme 2014 - 2016 objectives, namely simplifying the tax system

and non-tax rates in order to reduce administrative costs, both at taxpayer and public institutions levels.

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Within this component, World Bank consultants have performed an assessment of the

secondary legislation applied by the Competition Council and they have submitted the

proposal for amending the Merger Regulation (Order no. 385/2010 issued by the President

of the Competition Council, with subsequent amendments).

At the same time, starting with January 1st 2014, the secondary legislation of the European

Union on merges suffered significant changes regarding the simplified procedure for merger

analysis.

Considering the proposals submitted by the World Bank consultants, as well as the

requirements for compliance with the overall internal regulations, as well as those for

harmonizing domestic competition legislation, it was necessary to adopt a Regulation for

amending the Merger Regulation, in order to improve the legal framework applicable to

merger control.

The main changes are: increasing the importance of prior contacts between the competition

authority and undertakings intending to submit notifications in simplified form, the

openness and transparency of the competition authority by publishing information on all

merger notifications3 and by expanding the scope of the simplified procedure for merger

analysis considered unlikely to affect the competitive environment.

In the same operational programme mentioned above, World Bank consultants have

proposed to amend the Instructions regarding the conditions, terms and procedure for

accepting and assessing commitments, in the case of anti-competitive practices (Order no.

724/2010 issued by the President of the Competition Council, as subsequently amended and

supplemented). The amendment aims at explicitly providing the applicant the right to be

informed about the market test, as well as the right to make comments.

Moreover, the Regulation on acknowledging infringements and applying penalties was

amended in 2014, (Order no. 688/2011 issued by the President of the Competition Council),

the amendments being designed to clarify certain procedural aspects.

3 To enable parties to express their views.

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2. COMPETITION POLICY AND THE REFORM OF LEGAL FRAMEWORK IN KEY ECONOMIC SECTORS. INCREASE OF EFFICIENCY THROUGH PREVENTION AND ELIMINATION OF RENTS

Competition – Productivity – Economic Development

Productivity is the cornerstone of economic development, as it is perceived as an element

which should be constantly promoted by public policies. As productivity is determined by a

high number of factors, a systematized action targeting the increase of productivity proves

to be highly complex. This is why studies on the analysis of productivity at economy level

usually distinguish between three types of intermediary objectives: innovation, efficiency

and technology diffusion.

At the level of a country, beyond specific options, such as investments in education,

research or infrastructure, public policies often focus on the framework conditions which

ensure productivity growth. Competition is a key element in this framework, as it influences

the achievement of all previously-mentioned intermediary objectives.

Hence, technology diffusion is promoted by openness towards external competition and by

stimulating companies to incorporate new production processes and technologies. At the

same time, competition leads to allocation of limited resources to their best and highest

usage level, but also to a more efficient production. The link between innovation and

competition is less clear, the impact of competition on dynamic efficiency being widely

discussed in the literature.

The Role of the Competition Policy – a Comprehensive Perspective

The goal of the competition policy is to protect and stimulate competition through various

means. There is, however, a tendency to analyze the competition policy from a tighter

perspective, through competition authority’s application of specific legal provisions on anti-

competitive agreements, abuse of dominant position and merger control.

Even though they cover a considerable part of the competition authority’s activity, such

activities do not, however, offer a full picture. The competition policy, considered more

tightly, operates with only a subset of interest variables and overlooks specific tools which

can bring benefic effects to society in the long run.

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From a broader perspective, the competition policy’s distinctive feature is the involvement

of competition authority in the reform of laws and regulations deterring competition and

generating rents at the level of various economic sectors, through advocacy activities,

prevention of structural problems which are not a consequence of competition law

infringement or even through specific actions of other decision-makers in the economy.

The Role and the Need for Pro-competitive Legislative Reforms. Prevention

and Elimination of Economic Rents

The intense and fair manifestation of competition in different economic sectors improves

economic performance, opens business opportunities and eventually leads to the reduction

of costs of goods and services.

In order to reach specific objectives, numerous laws and regulations significantly restrict

competition on certain markets. Whenever this happens, productivity is constrained.

Control or imposing restrictions on economic activities may generate economic rents for

actors operating on those particular markets.

The use of rent concept in economics suffered significant (ideological) changes in time. The

economists of the classical school of thought used this concept to refer to unproductive

incomes4, obtained either through market power or as a consequence of natural limitations

of resources in the private sector. According to the neoclassical political economics, the

concept of rent changed to include the income generated by unproductive political activities

aiming for protection, maintenance or change of excess income generating rights.

In this report, the term rent is used to refer to those revenues which could not have been

obtained in a free competition environment.

Beyond the social welfare loss directly generated by the existence of rents, there is also a

waste of resources for business operators attempting to capture such rents. These activities

(rent seeking) can take various forms, both legal and illegal. Regardless of their form, since

no value is generated, these activities can impose significant costs on society.

Revising and eliminating redundant constraints imposed by normative acts, as well as other

government constraints, makes it possible to release the positive forces of competition, thus

stimulating the economy, as a whole.

Government actions are devised to promote and protect important public policy objectives.

There are, usually, several ways to reach such goals. The difficult task decision-makers face

is to identify the best course of action in order to reach specific objectives. In recent years,

4 Unproductive activities, according to the classical school of thought, refer to the use of production factors

without adding value to corresponding outputs.

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numerous countries have initiated reforms meant to improve the quality of regulations and

competition represents one of the reference factors in assessing different options.

Pro-competitive reforms aim to identify the measures that limit competition and to

highlight alternatives that meet the overall social and economic goals and, at the same time,

have less harmful effects on competition.

Often, self-regulatory bodies, governments or supranational institutions intervene through

regulations for correcting certain market failures. There is, however, a risk to generate

opposite effects, raising barriers to competition by hindering market entry or by inhibiting

innovation. Competition policy plays an important role in these situations, aiming to protect

competition by ensuring that regulations are proportionate to the market failure they

address.

Pro-competitive policies lead to increased productivity, to better employment and promote

investments. These effects are especially important for developing countries. The efficiency

of competition policy enforcement is one of the major factors explaining the productivity

gap between different countries. Low-competition markets usually have much lower

productivity than high-competition markets. This relationship is valid both for international

and for domestic markets.

The role of pro-competitive reforms is particularly important in the context of globalization,

as the success within the global economy is conditioned by the existence of competitive and

innovative markets.

Although, in terms of the impact on competition, it is generally accepted that the

assessment of legal framework leads to quality improvement and to higher economic

performance, the approach differs greatly from one country to another.

The assessment of regulations with respect to their impact on the competitive environment

implies the following two stages: a first stage identifying the provisions that affect

competition and a second stage when the necessary changes are carried out. In general, this

assessment focuses on the impact of legal provisions on elements like: price, market entry,

quantity, standards etc.

Such an approach implies, however, a joint contribution of several government bodies, and

the efficient integration of these structures in the operational activity can prove to be a

difficult process. However, the long term benefits of such reforms extensively exceed their

costs.

The OECD Approach

Based on the best international practices in this area, the OECD has issued a Competition

Assessment Toolkit, meant to support regulatory bodies identifying regulations likely to

harm competition in a timely manner, as well as better understanding of competition policy.

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Furthermore, the OECD Council also adopted a Recommendation that encourages OECD

Member and Non-Member State governments to implement competitive impact

assessment of various regulations. The new or existing laws, regulations and rules may be

subject to such an assessment.

Through the application of the tools adopted by the OECD, institutions with a legislative

initiative can make sure that decisions to adopt some regulations are taken based on clear

information concerning the cost/benefit ratio, in order to identify and avoid potential anti-

competitive effects of the regulatory process in a timely manner.

Whenever provisions with a negative impact on competition are identified, this toolkit

serves to develop alternative methods to reach the same objectives, with a minimum harm

of competition.

The OECD toolkit suggests a coherent assessment framework, in two stages:

Stage 1: Identifying the policies, laws and regulations with a negative impact on

competition. The Toolkit relies on the Checklist – a ‘filter’ from the competition perspective,

aiming to explore three major restriction groups:

1. Restrictions upon starting a new business. Potential competition limits the unilateral or

coordinated actions to raise prices, limit production etc. While there may be good

reasons to limit entry on a particular market, the benefits of pursuing public interest

should be assessed against potential anticompetitive effects. Policies can restrict the

entry of new undertakings by granting exclusive rights over goods or services, by

establishing licenses, permits or authorizations as requirement for operation, by

geographically limiting the supply of goods and services, by limiting capital investments

etc.

2. Regulations affecting the participant’s ability to compete. This category includes the

regulations that restrict advertising and marketing, set standards that restrict

competition by quality, control prices or those favoring certain companies or certain

production processes. These regulations may reduce the intensity and extent of

competition, resulting in higher prices for consumers and smaller variety of products and

services.

3. Regulations affecting companies’ behavior, changing their incentives to intensely

compete, namely regulations that facilitate coordination or regulations that reduce

consumer desire, ability or incentives to move from one competitor to another. The

policies can affect companies’ behavior in a particular market with regards to their

competitors by creating a system of self-regulation or co-regulation, by obligating or

recommending the publication of information on business results, prices, sales or costs,

by exempting certain industries or groups of undertakings from certain legal provisions

etc.

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Stage 2: Policy makers review the policies ‘filtered’ during the first stage.

Pro-competitive reforms are based on the idea that there are often multiple ways to achieve

a certain goal through public policies. Determining the best option can be a difficult task

that requires careful analysis, creativity and specific knowledge of the considered sector.

This second stage involves the following steps:

Developing feasible alternative policies aiming to meet the specific objective,

minimizing adverse effects on competition;

Comparing alternatives;

Identifying the best options.

The OECD initiative on the assessment of regulations from a competition point of view adds

rigueur, structure and transparency to the regulation reform process. The specific objective

of this initiative is to examine the possible impact of rules and regulations imposed by

government as well as the impact of different restrictions imposed by professional

organizations on competition. The OECD methodology can be used in four main ways:

1. As part of an overall evaluation of existing laws and regulations (either for the

economy as a whole or for specific sectors);

2. As part of a Regulatory Impact Analysis process for new laws and regulations;

3. By competition authorities to structure their competition advocacy efforts;

4. By government bodies, particularly those engaged in the development and review of

laws and secondary legislation.

The OECD Project in Romania

Romania, through the Competition Council, together with the Chancellery of the Prime

Minister and the Ministry of Public Finances, participates, between 2014 and 2015, in an

OECD project concerning the analysis of the impact of regulations in force in key sectors of

the Romanian economy.

This project aims at building a methodology for assessing the impact of public policy

documents and normative acts on the competitive environment, as well as for enhancing

the assessment expertise, both at the Government Centre, as coordinator of public policies,

and horizontally, at the level of ministries and authorities initiating normative acts and

strategic documents. The project is closely aligned with the Specific Recommendation no. 6

of the European Council, 2014, as it will help to significantly improve the quality of legislative

acts.

Public policies and regulations regarding business environment play an important role in the

efficient market functioning as well as in supporting public policy meeting its goals.

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To prevent or correct the negative effects on competition generated by certain provisions

from draft normative acts or from normative acts in force, the Competition Council is

empowered by law to issue approvals on draft normative acts which may have

anticompetitive effects5 and it can, at the same time, recommend the change of normative

acts which have such effects.

Within the current competition legal framework and given the Recommendation and

Guidelines adopted by the OECD, upon the proposal of the Competition Council, OECD

competition filter was implemented as part of a Regulatory Impact Analysis process in

Romania6. However, the efficiency of this filter implementation was limited, an important

cause being the lack of necessary expertise at ministry level.

Between 2014 and 2015, the legal framework for three key sectors of the Romanian

economy will be assessed, so that, subsequently, the revision process of this legal

framework should start. The key sectors analyzed in the project were selected, in

partnership, by the Chancellery of the Prime Minister, the Ministry of Public Finances and

the Competition Council. These sectors are:

Food processing;

Freight road and, possibly, naval transportation;

Constructions (mainly, construction materials for civil constructions and the

design, based on competitive bases, of tenders of civil construction works and,

secondary, expropriations and cadastre).

The following elements are the base for sectors’ selection: their impact on GDP, the

existence of suspicions on anti-competitive provisions, the feasibility analysis7 and the

anticipation of required reforms. These sectors are also the ones recommended by the

International Monetary Fund, by the European Commission and by the World Bank.

5 The authorities and institutions of central and local public administration have to request this approval.

6 G.D. no. 219/24.03.2010 for amending and supplementing the Appendix on the Government Decision no.

1361/September 27th

, 2006 on the content of the overview and justification instrument for the normative acts draft subject to Government approval. 7 To allow for quantitative and qualitative assessment of the effects of elimination of administrative barriers.

21

3. THE AGGREGATE INDEX OF COMPETITIVE PRESSURE

3.1. Introductory elements

The Aggregate Index of Competitive Pressure (hereunder AICP) is a working tool recently

developed by the members of the Economic Analysis Group with the Research-Analysis

Directorate of the Competition Council. AICP was first introduced in the institution’s 2013

report on the evolution of competition in the key sectors of Romania’s economy8.

Briefly, AICP measures the competition-orientation of industries in the national economy,

presenting the degree to which the analyzed industries approach an ideal situation, which

fully facilitates the free manifestation of competition. Subsequently, AICP does not measure,

nor does it intend to measure, the actual competition degree which occurs in reality,

detecting possible anti-competitive behaviors which could exist at the level of markets in

those industries being conducted in competition authority’s investigations based on the law.

We would like to underline that AICP has a broader scope, at industry level and from a

national perspective, while cases investigated by the Competition Council concern particular

situations existing on relevant markets analyzed in the investigations (markets which, most

often, have a limited, local dimension).

Since competition is a complex and multidimensional phenomenon, there is no single,

specific, competition index, which should be used in order to measure directly the

orientation to the free manifestation of competition in specific national industries. As a

consequence, what AICP proposes is measuring this proneness via a 20 primary indicator

battery, each of them reflecting a part of this complexity of competition. AICP is thus an

aggregate index which draws its origins from the theory of multi-criterial decision making

theory developed in the area of social choices.

Each of the 20 primary factors will be measured through a seven point scale, the lower value

of the scale representing the worst situation in terms of competition, while the upper end of

the scale is the most favorable situation for competition. Using the same scale for

assessment allows comparisons between the analyzed industries. It must be specified that

the information used by AICP is information internally available to the Competition Council,

the fact that the institution is organized by economic sectors, and that these sectors are

continuously monitored, greatly assisting our approach.

8 Report available online on the website of the competition authority:

http://www.consiliulconcurentei.ro/uploads/docs/items/id9017/evolutia_concurentei_in_sectoare_cheie.pdf

22

AICP proves useful in several areas. At a first, internal level, this economic analysis tool helps

level the continuous monitoring process of industries in the national economy by the

competition authority. Then, also at an internal level, the aggregate index can provide the

authority with additional information, supporting the decision-making process when

triggering law infringement investigations or concerning the effort prioritization in sector

inquiries. At an external level, AICP can successfully complete other proactive endeavors of

the Competition Council, e.g. the efforts of the institution to promote the competition

culture in the business environment or implement the leniency policy. Moreover, AICP can

support the action of the authority in the competition policy area, when discussing with

authorities and regulators of the different markets in the economy. Last, but not least, the

importance of such an economic tool also stems from its deterring function, i.e.

undertakings aware of the existence of the tool and with the possible intention to adopt an

anti-competitive behavior can choose to observe the rules of free competition for fear of

being detected and sanctioned subsequently.

AICP restrictions are, first of all, those of any composite index – see Arrow’s impossibility

theorem, but also the demonstration of G. Păun9. Then, the theoretical support of AICP and

the way the index is constructed rather focuses on the assessment of industries by the

competitive pressure manifested against the existence of agreements and tacit coordination

between competitors and less on possible cases of abuse of dominant position which may

occur in the analyzed industries. While fully acknowledging the relative limitations of the

aggregate index of competitive pressure, we believe that it is a valuable tool for the

competition authority.

3.2. Changes from the previous version

Since AICP is a tool recently developed by the Competition Council, after its first consistent

application in 20 industries in the national economy, but also following additional

consultations with researchers from other competition authorities10, the outcome was the

need to adjust some specific aspects of the index. The changes from AICP version presented

in autumn 2013 refer to the replacement of one of the 20 primary factors observed for

industries and the introduction of more importance levels of such factors. The Economic

9 Kenneth Arrow, Social Choice and Individual Values, Yale University Press, 1951. Gheorghe Păun, An

Impossibility Theorem for Social Indicators Aggregation, Fuzzy Sets and Systems, no. 9, 1983. Arrow has demonstrated that there is no method of indicator aggregation, complying with three reasonable conditions, at the same time (to be Pareto efficient, non-dictatorial and independent of irrelevant alternatives), his work becoming a milestone in the social choice theory. By using fuzzy set theory elements, G. Păun shows that an aggregate indicator cannot be sensitive, anticatastrophic and noncompensatory at the same time. Even with these limitations, indicator aggregation is widely implemented in various areas precisely because, most often, the analysed phenomena are not one-dimensional, but multi-faceted, and there are clear benefits in synthesizing multiple aspects in a single value. 10

AICP was presented to the participants in the competition conference of the countries in the Visegrad Group (Budapest, 20.03.2014). The Hungarian competition authority (GVH) expressed the highest interest in this economic analysis tool. The authors of this document would like to convey special thanks to Mr. Csaba Kovács with GVH for the extremely useful discussions on this topic.

23

Analysis Group within the competition authority is determined to operate other changes to

AICP, provided that such changes will lead to the refining of this tool.

The factor on import penetration rate, considering that a domestic market which is more

open to imports may be associated with a higher intensity of competition, was abandoned

mainly because the significance of the indicator in the area of services was considered

ambiguous, and likely to affect the comparability of analyzed industries.

However, another factor was included in the set of monitored indicators, namely the market

growth rate. The basic assumption is that, considering a fixed number of competitors, the

increase in market size facilitates agreements and tacit coordination among companies,

while the market decline hampers such anti-competitive behavior11. Consequently, the

propencity to competition of the analyzed industries is further considered in the light of 20

primary indicators.

Then, in terms of factor classification, we moved from two to four categories of factor

relevance. First of all, there is the importance attributed to barriers to entry, this factor

being almost unanimously considered as essential from the competition point of view, and

this is why it is now the only A+ factor included in the construction of AICP. The other

factors considered as very important, initially included in category A, maintain their place in

this category. Finally, four factors seen as rather circumstantial were relegated from

category B of ‘normally important’ factors to a lower class, named C.

The changes brought to the importance classes of the primary factors entering into AICP

involve adjustments to the scores that are awarded for each level of the scale by which

these factors are evaluated. Figure 3.1 shows the number of points assigned to each step of

the scale, depending on the importance of factors.

The figure shows that the single factor classified under category A+, namely the existence of

barriers to entry, receives 50% more points than the factors considered important, which

are included in category A. In turn, 50% more points have been allocated to these factors, as

compared to category B (medium importance factors). Finally, category C factors receive the

lowest number of points for each level of the seven steps scale.

The above-mentioned principle, which was also implemented in the first application of the

aggregate index, remains valid: potentially problematic situations from a competitive point

of view score lower, while pro-competitive situations score higher. This means that, at

aggregate level, a lower AICP value will increase the authority’s concerns regarding

competition.

11

There are various opinions on the impact of this factor in the specialized literature. Nonetheless, the authors

of this document adopt the opinion stated by Marc Ivaldi, Bruno Jullien, Patrick Rey, Paul Seabright and Jean

Tirole within the work The Economics of Tacit Collusion, IDEI, 2003.

24

The table below illustrates the 20 primary indicators used for assessing industries, several

comments and observations for each of them, as well as the affiliation of factors from the

four previously-mentioned importance classes.

Table 3.1. Indicators included in AICP construction, related assumptions and their type

Indicator Main assumption Type

Lack of barriers to entry

Agreements and coordination are easier to achieve when there are significant market-entry barriers, taking into account any such barriers (high fixed costs, networks, approvals or permits, brand strength, regulations, the importance of reputation etc.).

A+

Number of active undertakings

Agreements and coordination are easier to achieve when a smaller number of undertakings operate on the market.

A

Concentration degree

Agreements and coordination are easier to achieve when market concentration is higher.

A

Innovation degree Agreements and coordination are easier to achieve when markets are not innovative or when the impact of innovation (technological, of the processes or the business model) on performance is limited.

A

Transparency degree

Agreements and coordination are easier to achieve when the environment is more transparent (competitors can easily and accurately observe essential elements of other competitors’ activity: prices, costs, sales etc.).

A

Price elasticity of demand

Agreements and coordination are easier to achieve when demand is more inelastic (when there are no substitutable products for the current one and/or the need the product satisfies is stringent).

A

Figure 3.1. Points awarded based on the importance of factors

1.5

3

4.5

6

7.5

9

0

1

2

3

4

5

6

0.67

1.33

2

2.67

3.33

4

0.5

11.5

22.5

3

0

1

2

3

4

5

6

7

8

9

A (1) B (2) C (3) D (4) E (5) F (6) G (7)

Category A+ Category A Category B Category C

25

Table 3.1. – Continued

Indicator Main assumption Type

Product homogeneity

Agreements and coordination are easier to achieve when the product is homogenous, while product differentiation, especially by quality, represents an additional dimension of competition.

A

Existence and impact of business/employer associations

Agreements and coordination are easier to achieve within business or employer associations, especially when these are representative and very influential amongst their members.

A

Market share symmetry

Agreements and coordination are easier to achieve when market shares of the main competitors are symmetrical, such symmetry being a potential clue of other, deeper, similarities between competitors.

B

Existence of structural connections

Agreements and coordination are easier to achieve in case of structural connections between main competitors (joint-venture, cross shareholdings, cooperation agreements, joint participation in tenders).

B

Symmetry of costs Agreements and coordination are easier to achieve when main competitors have similar costs.

B

Investments in marketing and communication

The intensity of marketing and communication activities, assessed by reference to the turnover of main competitors, may be a clue to the intensity of competition.

B

Existence of maverick competitors

Agreements and coordination are easier to achieve when there are no maverick competitors (atypical competitors from various perspectives: innovation, costs, processes, business models etc.).

B

Market growth rate Considering the number of competitors as fixed, agreements and coordination are easier to achieve when the market is growing.

B

Fluctuations of aggregate demand

Agreements and coordination are easier to achieve when demand is stable, significant and unexpected fluctuations of demand affecting the stability of cartels or tacit coordination between competitors.

B

Buyer power Agreements and coordination are easier to achieve when buyers have a reduced bargaining power in relation to sellers, and merely accepting the terms offered by sellers.

B

Market share stability

Market share stability over time can indicate a low intensity of competition.

C

Multi-market contact

Agreements and coordination are easier to achieve when main companies meet and compete on several markets, especially when these interactions are frequent.

C

Profitability A high profit rate of main competitors can be a clue of anti-competitive practices (we take into account profitability within the analyzed industry).

C

General price level, as compared to other countries

A high price level, as compared to other countries, can indicate anti-competitive practices, even though the price is simultaneously affected by several other factors.

C

26

Figure 3.2. Application of AICP on 21 industries in the national economy in 2014

Industries ordered by the V4 version of the AICP

53%

50%

49%

47%

46%

43%

42%

42%

41%

37%

36%

36%

36%

35%

35%

34%

33%

32%

31%

28%

25%

53%

49%

51%

46%

48%

43%

43%

41%

41%

37%

37%

38%

36%

38%

36%

34%

34%

33%

32%

28%

26%

52%

48%

49%

47%

48%

43%

44%

41%

41%

35%

36%

39%

38%

41%

38%

35%

36%

36%

33%

28%

27%

0% 20% 40% 60%

Architecture services

Distribution of auto parts

Public sanitation services

Wholesale distribution of cars

Production of drugs

Food retail - supply side

Retransmission of audiovisual programmes

Food retail - distribution side

Life insurance

Motor hull insurance

Construction of roads and highways

Wholesale distribution of drugs

Mobile telecommunication services

Airport infrastructure access services

Retail fuel distribution

Motor third-party liability insurance

Distribution of LPG tanks for stove use

Railway freight transportation

Railway passenger transportation

Notary services

Production and sale of cement

V4

V2

V1

3.3. Application on 21 Industries in the national economy

Twenty-one industries in the national economy have been assessed using AICP in 2014,

measuring how close each of them is to an ideal situation, which involves full manifestation

of competition. Figure 3.2 below shows the results when computing AICP in three different

ways, in all cases a higher index value representing a higher propencity to competition of

the analyzed industry, while a lower value of the index indicates a wider gap from the ideal

situation.

27

Version V1 of the composite index is obtained when the 20 factors are considered as having

the same importance (for instance, all are included in class A). This rough version of AICP is

only presented for comparison with the following ones. The second version of the

composite index, named V2, is the one considering two primary factor types, namely the A

and B category factors, as AICP was first constructed and presented (see the 2013 report of

the Competition Council on the development of competition in key sectors). Finally, version

V4 of the index is the one proposed now, which takes into account the particular

importance of barriers to entry (class A+), as well as the relative relegation of some

circumstantial factors of the C importance class.

In our opinion, the above-illustrated values show that the use of the four indicator classes

meets its purpose, hence it is a step forward in the AICP evolution. For example, the

differences in the composite index values for passenger and freight railway transportation,

production and sale of cement, retail fuel distribution, and, especially, airport infrastructure

access services indicate that barriers to entry now receive the well-deserved importance.

Given these results, the V4 version of the composite index seems to be the most

appropriate at this time.

Since the selected industries were also assessed at the level of 2013 based on the V4

version, Figure 3.3 shows the main AICP values (V4) for two consecutive years. The chart

shows a natural aspect, which could even have been anticipated, i.e. year-to-year

differences of the value of the aggregate index are relatively limited. Thus, the maximum

difference is found in the case of mobile telecommunication services, in amount of 3

percentage points (pp)12, while for most sectors differences were either null, or limited

(below 1 pp). This is because the factors included in the AICP analysis are mostly structural,

pertaining to the manner in which the sector is organized and thus present high inertia to

change.

Similar to the first application of the aggregate index, we identify three groups of industries,

defined through the quartiles 13 and considering the AICP values for 2014:

- The first 5 industries, with AICP values over Q3=46%, represent the group of

industries most prone to free manifestation of competition;

- The following 11 industries, with AICP values between Q1 and Q3, hence in the [34%,

46%) range, represent the group of middle industries;

- The last 5 industries, with AICP values under Q1=34%, represent the group of

industries most prone to anti-competitive behavior.

12

The AICP value (V4) increase in 2014 is generated by recent pro-competitive changes within the industry. 13

Quartiles are position indicators frequently used in the statistics practice. Q1, the lower quartile, is the value dividing the data series in two groups, 25% of the series values being lower than Q1, whereas 75% of the values exceed this first quartile. Similarly, 25% of the series values exceed Q3, the upper quartile, whereas 75% of observations are lower than the Q3 value.

28

The placement of industries under these categories fully observes their characteristics. For

example the last group, that of sectors most prone to anti-competitive behavior includes

industries with high barriers to entry, in which ‘maverick’ competitors do not operate, which

lack innovative processes and which involve homogenous products.

Figure 3.3. The application of AICP (V4) on 21 industries in the national economy, 2013-2014

Industries ordered by the AICP results (V4) of 2014

53%

50%

49%

47%

46%

43%

42%

42%

41%

37%

36%

36%

36%

35%

35%

34%

33%

32%

31%

28%

25%

52%

51%

49%

49%

46%

43%

42%

42%

42%

36%

35%

36%

33%

35%

34%

34%

33%

32%

31%

28%

24%

0% 20% 40% 60%

Architecture services

Distribution of auto parts

Public sanitation services

Wholesale distribution of cars

Production of drugs

Food retail - supply side

Retransmission of audiovisual programmes

Food retail - distribution side

Life insurance

Motor hull insurance

Construction of roads and highways

Wholesale distribution of drugs

Mobile telecommunication services

Airport infrastructure access services

Retail fuel distribution

Motor third-party liability insurance

Distribution of LPG tanks for stove use

Railway freight transportation

Railway passenger transportation

Notary services

Production and sale of cement

2014

2013

Q3=46%Q1=34%

29

3.4. A further step in the AICP analysis

Given the relatively high number of primary indicators considered, which allow for the

observation of proneness to the free manifestation of competition from several

perspectives, the analysis is extended through the decomposition of AICP into several main

components. To this purpose, we have divided the indicators into three groups, in a manner

somewhat similar to that employed by Decker14 and the Structure-Conduct-Performance

paradigm in the economic area of industrial organization.

Hence, group I contains those factors that capture structural conditions, impacting the

possibility of free expression of competition. Most of the primary indicators analyzed (12

factors) are included in this group, namely those concerning the number of competitors and

the concentration degree, the market share stability, the innovation degree and industry

transparency, entry barriers, demand fluctuations and elasticity, price level and profitability,

buyer bargaining power and market growth rate.

Group II includes those factors monitoring the similarity degree between the main

competitors. Four primary indicators are included in this group, namely those referring to

the symmetry of market shares and costs, the existence of ‘maverick’ competitors and

product homogeneity.

Finally, group III contains those factors that capture aspects on competitor behavior. Four

primary indicators are included here, namely those focusing on multi-market contact,

existence of structural connections, intensity of marketing and communication activities and

the existence and impact of business and employer associations.

Based upon this classification, we can state that group III includes indicators that capture

the current industry aspects on which the main competitors’ actions can have a certain

impact, whereas groups I and II include rather exogenous factors, that are out of the reach

of companies. The difference between these last two groups arises from the fact that, while

group I includes structural factors, regarding the overall organization and operation of the

industry, group II embeds factors regarding active competitors in terms of their similarities.

Given the above classification, we can present the collected data aggregated at group level,

in a way similar to which AICP is constructed. We believe that the breakdown of the

aggregate index in the three main components is a useful step in the analysis, which

provides a range of additional information and leads to a deeper understanding of previous

results.

14

Christopher Decker, Economics and the Enforcement of European Competition Law, Edward Elgar, 2009

30

Figure 3.4 illustrates the results broken down to the three main components of the AICP,

but also the aggregate index value, by which the analyzed industries are ordered15. Thus,

some fundamental differences become obvious between some of the 21 industries assessed

through the aggregate index of competitive pressure.

3.5. Conclusions

The chapter presents the sequel of an action taken one year ago which aimed at the

assessment of some industries in the national economy from the perspective of the

Aggregate Index of Competition Pressure. Subsequent to the first application of AICP in

2013 and further discussions on this topic, several changes were operated to this economic

analysis tool. Subsequently, values for 2013 were recalculated, and are presented in this

report together with the values for 2014.

From our point of view, the aggregate index represents a tool useful both from an internal

perspective, that of our institution, as well in the relation of the competition authority with

the business environment and stakeholders from different economic sectors. Given the

usefulness of AICP, the competition authority is considering continuing to use it and,

possibly, extending its scope through the assessment of several industries in the national

economy. Last, but not least, the Economic Analysis Group with the Research-Analysis

Directorate of the Competition Council can decide upon the further refining of this tool so

that it suits the needs of the competition authority.

15

The AICP value shown in the right hand side of the graph should not be considered a summation of the values for the three components. For each industry, the AICP value is in fact a weighted average of the three values before it. Given the number of factors included in each group, but also the different importance of these factors (by inclusion in categories A+, A, B or C), the weights of groups I, II and III are 63%, 18%, and 19%.

31

Figure 3.4. Evaluation of industries depending on the three major components of AICP

Industries ordered by the AICP (V4) results

53%

50%

49%

47%

46%

43%

42%

42%

41%

37%

36%

36%

36%

35%

35%

34%

33%

32%

31%

28%

25%

0% 25% 50% 75%

AICP (V4)

58%

49%

46%

44%

39%

46%

40%

41%

37%

37%

39%

34%

29%

30%

29%

33%

34%

31%

28%

28%

26%

0% 25% 50% 75%

Architecture services

Distribution of auto parts

Public sanitation services

Wholesale distribution of cars

Production of drugs

Food retail - supply side

Retransmission of audiovisual programmes

Food retail - distribution side

Life insurance

Motor hull insurance

Construction of roads and highways

Wholesale distribution of drugs

Mobile telecommunication services

Airport infrastructure access services

Retail fuel distribution

Motor third-party liability insurance

Distribution of LPG tanks for stove use

Railway freight transportation

Railway passenger transportation

Notary services

Production and sale of cement

Group I (structure)

33%

48%

52%

45%

56%

35%

33%

24%

48%

32%

24%

24%

43%

33%

35%

32%

22%

30%

35%

20%

4%

0% 25% 50% 75%

Group III (similarity)

52%

55%

58%

59%

60%

41%

59%

63%

47%

43%

40%

57%

53%

59%

54%

43%

42%

40%

36%

32%

46%

0% 25% 50% 75%

Group II (behavior)

32

4. THE LIFE INSURANCE SECTOR

This chapter relies to a large extent on the study conducted by the Competition Council on

the life insurance sector in Romania; this study will be available on the website of the

competition authority and will be submitted to public debate. Consequently, those

interested in the life insurance sector are guided to that study, as the Competition Council is

interested in all comments stakeholders in this area may have.

4.1. Introduction

Under the applicable rules, the general category of life insurance comprises six different

insurance classes:

A.I – Life insurance, annuities and supplemental life insurance, stipulated in

Appendix 1 of Law no. 32/2000 under letter A a), b) and c), except for those

stipulated under items II and III;

A.II - Marriage insurance, birth insurance;

A.III - Unit-linked life assurance and annuities, stipulated in Appendix 1 of Law no.

32/2000 under letter A a) and b);

A.IV - Permanent health insurance, stipulated in Appendix 1 of Law no. 32/2000

under letter A d);

B.1 - Accident insurance (including labor accidents and professional

sickness);

B.2 - Health insurance.

The analysis of the Competition Council on the life insurance sector in Romania focuses on

the period January 2011 – June 2014. The 21 life insurance companies operating on the

market in this period are: S.C. Aegon Asigurări de Viață S.A. (AEGON), S.C. Alico Asigurări

România S.A. (ALICO), S.C. Allianz-Țiriac Asigurări S.A. (ALLIANZ-ȚIRIAC), S.C. Asigurare-

Reasigurare Ardaf S.A. (ARDAF), S.C. Asigurarea Românească – Asirom VIG Vienna Insurance

Group S.A. (ASIROM), S.C. Asigurare-Reasigurare Astra S.A. (ASTRA), S.C. Axa Life Insurance

S.A. (AXA), S.C. BCR Asigurări de Viață Vienna Insurance Group S.A. (BCR), S.C. BRD Asigurări

de Viață S.A. (BRD), S.C. Cardif Asigurări S.A. (CARDIF), S.C. Ergo Asigurări de Viață S.A.

(ERGO), S.C. Eureko Asigurări S.A. (EUREKO), S.C. Eurolife ERB Asigurări de Viață S.A.

(EUROLIFE ERB), S.C. Garanta Asigurări S.A. (GARANTA), S.C. Generali România Asigurare

Reasigurare S.A. (GENERALI), S.C. Grawe România Asigurare S.A. (GRAWE), S.C. Groupama

Asigurări S.A. (GROUPAMA), S.C. ING Asigurări de Viață S.A. (ING), S.C. Metropolitan Life

Asigurări S.A. (METROPOLITAN), S.C. Signal Iduna Asigurări de Viață S.A. (SIGNAL IDUNA)

and S.C. Uniqa Asigurări de Viață S.A. (UNIQA).

33

Several other life insurance companies operating during 2009-2011 and only briefly referred

to within this chapter are: S.C. Asiban S.A (ASIBAN), S.C. ATE Insurance România S.A. (ATE),

S.C. BT Asigurări Transilvania S.A. (BT), S.C. Delta Asigurări S.A. (DELTA), S.C. KD Life

Asigurări S.A. (KD LIFE), S.C. Omniasig Asigurări de Viață S.A. (OMNIASIG) and S.C. Onix

Asigurări S.A. (ONIX).

Table 4.1 illustrates the life insurance classes covered by the products offered by each of the

17 insurance companies active at mid-2014 and which are monitored by the Financial

Supervisory Authority (FSA). The table shows that all insurance companies offered A.I class

products and almost all offered A.III class products, whereas only two companies offered

insurance products in A.II and A.IV

classes.

Accident insurances (class B.1)

were included in the portfolio of

seven companies, B.2 class

insurances (health, but non-

permanent) were offered by nine

companies, whereas A.II and A.IV

class insurances can be neglected

(not only these insurances were

offered by few companies in June

2014, but also the gross written

premium for these insurance

classes are very low at market

level). It is interesting to notice that

no insurer offered all six life

insurance classes in June 2014.

Consequently, Table 4.1 can be

seen as a first argument in favor of

a separate analysis of actual life

insurances (classes A.I and A.III) from other life insurance classes, especially B.1 and B.2.

A further argument, perhaps more relevant, is given by the very characteristics of these

types of insurance. Specifically, life insurances in classes A.I and A.III meet certain needs, for

long-term financial protection, these insurance products also comprising a saving tool, while

insurances in classes B.1 and B.2 meet completely different needs (protection against

accidents and health insurance, but not permanent). Consequently, even if insurance

companies offering A.I and A.III classes could decide to also offer B.1 and B.2 insurances

(most likely, there is supply-side substitutability), consumers of actual life insurances do not

see these products as being interchangeable with insurances in B.1 and B.2 classes, as

insured risks, as well as premium levels, are completely different. Demand-side

Table 4.1. Life insurance classes offered by each market player

Life insurance companies

A.I A.II A.III A.IV B.1 B.2

ALLIANZ-ȚIRIAC

ASIROM

ASTRA

AXA

BCR

BRD

ERGO

EUREKO

EUROLIFE ERB

GARANTA

GENERALI

GRAWE

GROUPAMA

ING

METROPOLITAN

UNIQA

SIGNAL IDUNA

34

substituibility, from consumers’ point of view, is essential in defining markets from a

competition perspective and comprises an additional argument in favor of a separate

analysis of actual life insurances.

4.2. Recent developments in the life insurance sector in Romania

Figure 4.1 presents the quarterly evolution of the Romanian life insurance sector,

considering net gross written premiums after cancellation (GWP), both for all six classes

included, according to law, in the life insurance category, and, separately, for the two actual

life insurance classes (classical or traditional life insurances and life insurances linked to

investment funds, therefore having an investment component).

As can be seen, after the increase in 2012, the year 2013 comprises a return to the level of

2011 (even a decrease below this level for the two main classes of life insurance), while the

mid-2014 has the lowest six month values within the analyzed period. Therefore, the

prospects for 2014 are not encouraging at this time.

The chart above shows that the core of the life insurance sector in Romania is represented

by the A.I and A.III insurance classes, these two classes of insurance accounting for the vast

majority of written premiums. Specifically, the chart shows that in any quarter from January

2011 - June 2014, the GWP for actual life insurances (classes A.I and A.III) accounted for at

least 87% of total gross written premiums for all six life insurance classes.

Figure 4.2 presents the quarterly evolution of the number of agreements in force (NAF) for

all companies active on the life insurance market during January 2011 – June 2014,

Figure 4.1. Quarterly evolution of GWP for all six life insurance classes and, separately, for classes A.I

and A.III, during January 2011 – June 2014

Source: Own calculations based on information supplied by FSA (for insurance companies supervised by the institution)

43

7.0

86

6.5

1,2

99

.0

1,7

59

.7

44

4.2

88

5.6

1,3

83

.3

2,0

04

.6

46

8.9

92

6.0

1,3

11

.1

1,7

45

.5

40

0.2

80

0.8

42

4.0

83

6.7

1,2

57

.7

1,6

87

.2

41

3.7

82

4.5

1,2

43

.6

1,7

33

.8

40

6.2

83

0.0

1,1

83

.5

1,5

69

.8

36

6.9

73

3.5

0

500

1,000

1,500

2,000

2,500

3L 2011 6L 2011 9L 2011 2011 3L 2012 6L 2012 9L 2012 2012 3L 2013 6L 2013 9L 2013 2013 3L 2014 6L 2014

mill

ion

RO

N

All life insurance classes Classes A.I and A.III

35

Figure 4.2. Quarterly evolution of NAF for all six life insurance classes and for classes A.I and A.III during January 2011 – June 2014

Source: Own calculations based upon the information provided by FSA (for insurers under the institution supervision)

4,2

11

4,0

85

3,9

66

3,7

44

3,9

85

4,1

60

4,4

47

4,6

46

4,8

34

4,8

20

4,9

27

4,8

71

4,6

75

4,6

08

3,8

69

3,7

44

3,6

29

3,3

32

3,2

11

3,2

61

3,3

03

3,2

31

3,3

34

3,3

10

3,3

93

3,3

72

3,3

45

3,3

61

0

1,000

2,000

3,000

4,000

5,000

3L 2011 6L 2011 9L 2011 2011 3L 2012 6L 2012 9L 2012 2012 3L 2013 6L 2013 9L 2013 2013 3L 2014 6L 2014

tho

usa

nd

s o

f ag

reem

ents

All life insurance classes Classes A.I and A.III

separately illustrating the situation for all six life insurance classes and for actual life

insurances (classes A.I and A.III). Although the total number of agreements has been on an

upward trend until the end of 2013, it is clear that this increase was not due to actual life

insurances. In fact, the increase was mainly due to policies concluded for B.1 and B.2

insurance classes and is somewhat artificial, being largely the result of commercial decisions

of a single insurer. In terms of AI and A.III life insurance classes, the chart below shows a

gradual reduction in the number of agreements during 2011-2012, followed by a relative

stabilization in 2013 and during the first half of 2014.

Figure 4.2 shows that the evolution in the number of agreements in force for insurances in

classes A.I and A.III is different in the analyzised period from that of all six life insurance

classes. From our point of view, the difference in the observed evolutions is an argument

favoring the separate analysis of actual life insurances, an additional argument to the

previously stated ones.

The following table is taken from the FSA report for year 201316 (page 46) and illustrates the

GWP structure within the insurance sector during 2009-2013. Data show that in 2013

Romanian life insurance accounted for approximately 20% of the entire sector, the trend of

recent years being to gradually reduce the importance of this component.

16

Report available online at: http://www.asfromania.ro/files/Raport%20anual%20ASF%202013_.pdf

36

Figure 4.3. Quarterly evolution of GWP for actual life insurances and their reporting to Romania’s GDP during January 2011 – June 2014

Source: Own calculation based upon the information provided by FSA (for insurers under the institution supervision) and

those available on the National Institute of Statistics website. NB: Quarterly GDP, in current prices, final data for 2011,

semi-final for 2012 and interim for years 2013-2014.

424.0

836.7

1,257.7

1,687.2

413.7

824.5

1,243.6

1,733.8

406.2

830.0

1,183.5

1,569.8

366.9

733.5

0.39% 0.35% 0.32% 0.30% 0.37% 0.33% 0.30% 0.30% 0.34% 0.31% 0.27% 0.25% 0.29% 0.26%0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

3L 2011 6L 2011 9L 2011 2011 3L 2012 6L 2012 9L 2012 2012 3L 2013 6L 2013 9L 2013 2013 3L 2014 6L 2014

GWP in million RON (left axis) GWP as percetage in GDP (right axis)

Table 4.2. Annual GWP level for life insurance and general insurance during 2009-2013

2009 2010 2011 2012 2013

Life

insurance

GWP (RON) 1,628,162,635 1,665,668,554 1,738,366,854 1,802,519,132 1,634,296,439

Percentage in

total GWP (%) 18.36 20.06 22.22 21.83 20.12

General

insurance

GWP (RON) 7,241,584,322 6,639,733,598 6,083,943,098 6,454,395,818 6,490,358,402

Percentage in

total GWP (%) 81.64 79.94 77.78 78.17 79.88

Figure 4.3 indicates the penetration degree of Romanian life insurances, expressed as

percentage in Romanian gross domestic product (GDP) of GWP for insurances in classes A.I

and A.III . The chart shows that this indicator varies significantly in 2011-2013, between

0.25% and 0.39%. Given the reluctant start of 2014, with the lowest values for three and six

months, our expectation on the GDP penetration degree of actual life insurances is that the

indicator will decline for year 2014 (probably towards 0.25%).

It should be noted that the chart above illustrates the nominal situation of GWP, with

premiums expressed in current prices, while the situation in real terms, adjusted for

inflation, will be presented later. While not the most eloquent, at least in terms of

comparisons over time, expressing GWP in nominal terms facilitates reference to GDP.

Another useful indicator that captures life insurance density in a particular country is

calculated by expressing GWP for such insurance and relative to the population, meaning

37

that this indicator quantifies the average annual life insurance premium per capita. Figure

4.4 shows the relevant data for the past four years.

As above, we note that GWP are expressed in current prices, which means that the analysis

is performed in nominal terms. Then, since the data on 2014 are partial (only for the first six

months), the chart below shows an estimate for this year. To facilitate comparison with

other European countries, which will be shown in the next section, this indicator is

expressed in euro/capita.

The chart above shows a steady downward trend in the average premium per capita for life

insurance in Romania, especially for A.I and A.III insurance classes, which is by no means

encouraging for the future of the life insurance sector.

Figure 4.5 shows the GWP evolution in real terms (constant prices of January 2011) for

actual life insurances, so with strict reference to A.I and A.III insurance classes. As can be

seen, during the analyzed period, there are only decreases in premiums for A.I and A.III

insurance classes: -0.6% in 2012 compared to 2011, -12.9% in 2013 compared to 2012,

respectively -12.5% during the first half of 2014 compared to the same period of 2013.

Therefore, the image projected by Figure 4.5 on the evolution in the recent years for

classical life insurances and those related to investment funds is one of continuous

contraction of the sector. This contraction seems to have increased in 2013 and the values

recorded for the first half of 2014 seem to indicate a further reduction in size for the life

insurance sector in Romania.

Figure 4.4. The annual evolution of Romanian life insurance density, expressed as GWP/population (in euro per capita), during 2011-2014

Source: Own calculations based upon FSA, NSI and NBR data.

NB: Romanian population data are provisional and refer to the stable population at the beginning of each

year. The euro exchange rate is the average annual rate of central bank for 2011-2013 and the simple

average of daily values of the first half of 2014.

* Own estimate based on the evolution of 2011-2013 and the values recorded at 6 months.

19.3

9 21.0

7

18.5

4

17.2

2 18.5

9

18.2

2

16.6

7

15.4

5

0

4

8

12

16

20

24

2011 2012 2013 2014*

euro

/cap

ita

All life insurance classes Classes A.I and A.III

38

Figure 4.5. Evolution of GWP in current and constant prices, for A.I and A.III life insurance classes, and comparisons with the similar period of previous year, during January 2011 – June 2014

Source: Own calculations based upon the information provided by FSA (for insurers under the institution supervision) and

those available on the NIS website. NB: For conversion to constant prices of January 2011, we used monthly values of the

consumer price index published by NIS and assumed that GWP are written constantly during each quarter.

424.

0

836.

7

1,25

7.7

1,68

7.2

413.

7

824.

5

1,24

3.6

1,73

3.8

406.

2

830.

0

1,18

3.5

1,56

9.8

366.

9

733.

5

421.

0

825.

3

1,24

0.9

1,66

1.8

400.

5

795.

5

1,19

3.0

1,65

1.2

372.

2

759.

0

1,08

3.5

1,43

8.3

332.

7

664.

1

-4.9%-3.6% -3.9%

-0.6%

-7.1%

-4.6%

-9.2%

-12.9%

-10.6%

-12.5%

-30%

-27%

-24%

-21%

-18%

-15%

-12%

-9%

-6%

-3%

0%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

3L 2011 6L 2011 9L 2011 2011 3L 2012 6L 2012 9L 2012 2012 3L 2013 6L 2013 9L 2013 2013 3L 2014 6L 2014

mill

ion

RON

GWP in current prices GWP in constant prices of January 2011 (left axis) Percentage change (right axis)

The figure which follows illustrates the quarterly evolution of the number of life insurance

companies active on the Romanian market and which were under FSA supervision between

2009 and 2014, including some details on this evolution. The figure shows the constant

decline in the number of insurance companies in the past years. Thus, while at the

beginning of 2009 there were 24 life insurers active on the market, currently only 16

companies operate (18 if we also take into account the local branches of insurance

companies registered in other European states).

The expectations for the near future indicate that another insurer will leave the market, the

intention of AXA in this respect being publicly expressed by the company.

In conclusion, even though the number of market players is not very low, recent

developments are somewhat worrying, which means that the competition authority will

have to continue to carefully monitor this economic sector.

4.3. Comparisons with other European states The low level of development of the life insurance sector in Romania, that seems to be fully

acknowledged at market level, becomes obvious when comparisons are made with other

European countries. The comparative analysis below is based on information regarding the

situation of insurance in Europe, collected by Insurance Europe17.

17

Association of insurance and reinsurance companies from 34 European countries, member companies accounting for 95% of written premiums throughout the continent. For details, see www.insuranceeurope.eu

39

Figure 4.6. Evolution of the number of companies active on the Romanian life insurance market and which are under the supervisions of FSA during

2009-2014

Source: Own presentation of publicly available information

24 24 2423

22 22 2221 21 21 21

2019 19 19 19 19

18 1817 17 17

16

10

15

20

25

T1/2009 T2/2009 T3/2009 T4/2009 T1/2010 T2/2010 T3/2010 T4/2010 T1/2011 T2/2011 T3/2011 T4/2011 T1/2012 T2/2012 T3/2012 T4/2012 T1/2013 T2/2013 T3/2013 T4/2013 T1/2014 T2/2014 T3/2014

ASIBAN şi BT merge, the new

company operates under

the name of GROUPAMA

DELTA exits themarket

AXA enters the market (by taking

over OMNIASIG)

ERGO and UNIQA enter the market

ONIX exits the market (portfolio taken over

by GROUPAMA)ATE exits the market

KD LIFE exits the market (portfolio

taken over EUREKO)

CARDIF permit

withdrawn upon

company request*

ARDAF exits the market

(portfolio taken over

by GENERALI)

ALICO enters the

market (bytaking

over AVIVA)

AEGON permit

withdrawn upon

company request*

ALICO exits the market (portfolio

taken over by METROPOLITAN)

EUREKO exits the market (portfolio

taken over by AEGON)

AXA portfolio

taken over by ASTRA to

be completed

* CARDIF portfolio transferred to CARDIF Assurance Vie Paris, Bucharest brach, AEGON portfolio transferred to AEGON Towarzystwo Ubezpieczen na Zycie SA Varşovia, Floreşti branch, companies that willoperate in Romania based upon the right for establishment and free movement of services within the European Union.

40

Figure 4.7. Share of life insurance within the total insurance sector for 31 European countries in 2012

Source: Insurance Europe, The European Life Insurance Market in 2012

82

.5%

80

.4%

77

.3%

72

.4%

66

.3%

64

.7%

62

.7%

62

.7%

62

.4%

62

.0%

61

.8%

58

.6%

57

.8%

54

.6%

52

.7%

52

.6%

52

.0%

49

.3%

47

.5%

46

.3%

44

.9%

42

.7%

39

.9%

28

.7%

27

.2%

25

.3%

20

.2%

18

.8%

16

.4%

16

.3%

14

.1%

7.4

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

De

nm

ark

Swe

de

n

Ire

lan

d

Un

ite

d K

ing

do

m

Ita

ly

Be

lgiu

m

Ma

lta

No

rwa

y

Fra

nce

Po

rtu

ga

l

Luxe

mb

ou

rg

Po

lan

d

TO

TA

L

Swit

zerl

an

d

Est

on

ia

Slo

vaki

a

Hu

ng

ary

Cze

ch R

ep

ub

lic

Spa

in

Ge

rma

ny

Gre

ece

Cyp

rus

Au

stri

a

Slo

ven

ia

Cro

ati

a

Ne

the

rla

nd

s

Ro

ma

nia

Fin

lan

d

Latv

ia

Bu

lga

ria

Tu

rke

y

Ice

lan

d

The differences between the values shown for Romania in the charts below and those

calculated based on FSA data are not considered to be significant in terms of size, such

differences, probably related to methodological considerations, not being able to affect the

overview.

Figure 4.7 shows the share of life insurance in the total insurance sector of 31 European

countries. The chart shows that the GWP level for life insurance, relative to the total GWP in

the insurance sector, is very low in Romania compared to the European average (from

20.2% in our country in 2012 vs. almost 58% for the 31 countries included in the analysis).

Next, Figure 4.8 includes a comparison of the GWP share in GDP for life insurance, showing

that the difference between the level of insurance penetration in Romania and in Western

European countries is overwhelming. This difference probably comes from the tradition of

developed countries in terms of the insurance act in general, and life insurance in particular,

the level of awareness and acceptance of people regarding life insurance products, the living

standard of Western and Northern Europe etc.

But even if the gap with the situation in Western Europe could be considered natural for

rather historical reasons, the same cannot be stated about the differences between the case

of Romania and other countries in the region: in Poland, the premiums related to life

insurance amount to 2.3% of the GDP, 1.8% in the Czech Republic, Slovakia 1.6%, while in

Hungary the penetration degree is 1.4%. In addition, historical data show that the gap

41

Figure 4.8. Penetration degree of life insurances (written premium as percentage of GDP) in 2012

Source: Insurance Europe, The European Life Insurance Market in 2012

10

.3%

7.2

%

5.7

%

5.6

%

5.4

%

5.2

%

5.0

%

4.5

%

4.4

%

4.1

%

3.2

%

3.2

%

2.8

%

2.6

%

2.5

%

2.5

%

2.3

%

2.1

%

2.0

%

2.0

%

1.8

%

1.6

%

1.6

%

1.4

%

0.9

%

0.9

%

0.7

%

0.3

%

0.3

%

0.2

%

0.2

%

0.2

%

0%

2%

4%

6%

8%

10%

12%

Un

ite

d K

ing

do

m

De

nm

ark

Fra

nce

Be

lgiu

m

Swit

zerl

an

d

Swe

de

n

Ire

lan

d

TO

TA

L

Ita

ly

Po

rtu

ga

l

Ge

rma

ny

Ne

the

rla

nd

s

No

rwa

y

Luxe

mb

ou

rg

Spa

in

Ma

lta

Po

lan

d

Au

stri

a

Cyp

rus

Fin

lan

d

Cze

ch R

ep

ub

lic

Slo

ven

ia

Slo

vaki

a

Hu

ng

ary

Est

on

ia

Gre

ece

Cro

ati

a

Bu

lga

ria

Ro

ma

nia

Ice

lan

d

Tu

rke

y

Latv

ia

between Romania and the rest of Europe in terms of penetration of life insurance is

extended on a long-term, without 2012 being an exception.

The comparison with other European countries is also relevant in terms of life insurance

density, expressed as the annual average premium for such insurance, per capita.

The information collected by Insurance Europe is illustrated in Figure 4.9 and shows that, in

2012, Romania is still at the bottom of the ranking of all European countries included in the

analysis. According to this source, the annual average premium of about 16 euro/person18 is

the lowest of the 31 countries surveyed.

According to the chart below, except for Bulgaria, the differences in the average premium

per capita are significant when compared to countries in the region, countries which are

considered to have a relatively close level of economic growth to that of Romania. For

example, the annual average premium for life insurance amounted in 2012 to 139

euro/capita in Hungary, 206 euro/capita in Slovakia, 225 euro/capita in Poland and 272

euro/capita in the Czech Republic.

18

Again, the differences between this value and those included in Figure 4.4 probably refer to the coverage of insurance companies (our study contains almost all insurance companies) and the accuracy of the data collected from market participants. However, the differences are not considered relevant in magnitude, hence we believe the two studies support each other.

42

Figure 4.9. The average value, in euro per capita, for the life insurance premium in 31 European countries in 2012

Source: Insurance Europe, The European Life Insurance Market in 2012

3,24

6

3,11

7

2,8

70

2,23

9

2,22

7

2,21

2

1,88

2

1,78

9

1,73

4

1,14

6

1,13

5

1,07

2

1,02

7

77

0

69

1

64

2

57

6

41

4

40

7

28

2

27

2

22

5

20

6

17

2

13

9

11

5

74

67

18

17

16

16

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Swit

zerl

and

Den

mar

k

Un

ited

Kin

gdo

m

Luxe

mb

ou

rg

Swed

en

No

rway

Bel

giu

m

Irel

and

Fran

ce

Ital

y

Net

her

lan

ds

TOTA

L

Ger

man

y

Au

stri

a

Fin

lan

d

Po

rtu

gal

Spai

n

Cyp

rus

Mal

ta

Slo

ven

ia

Cze

ch R

epu

blic

Po

lan

d

Slo

vaki

a

Gre

ece

Hu

nga

ry

Esto

nia

Cro

atia

Icel

and

Bu

lgar

ia

Latv

ia

Ro

man

ia

Turk

ey

Figure 4.10. Number of life insurers and their ratio to population in 25 states in 2011

Source: Insurance Europe for the information on the number of insurers, Eurostat for information on population

136 103 94 78 52 50 44 40 31 30 28 25 22 22 21 21 20 18 18 16 16 11 11 4 3

2.9

1.6 1.1 1.3

4.7

9.0

2.6

4.2

3.7

2.8

0.7 0.3

2.1 1.9

1.0

3.9

2.5

3.3

1.8 2.2

3.6

2.2

5.4

3.0

1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

10.5

0

20

40

60

80

100

120

140

Spai

n

Fran

ce

Ger

man

y

Ital

y

Bel

giu

m

Den

mar

k

Net

her

lan

ds

Swed

en

Au

stri

a

Po

rtu

gal

Po

lan

d

Turk

ey

Cze

ch R

epu

blic

Gre

ece

Ro

man

ia

Slo

vaki

a

Swit

zerl

and

Fin

lan

d

Hu

nga

ry

Bu

lgar

ia

Cro

atia

No

rway

Slo

ven

ia

Esto

nia

Latv

ia

Number of life insurers (left axis) Life insurers per one million inhabitants (right axis)

Figure 4.10 shows the number of life insurance companies in 25 countries in 2011. In order

to provide an additional perspective on life insurer density, the chart indicates the average

number of companies per million inhabitants in each state.

43

Considered in an international context and in relation to population size, the number of life

insurers in Romania was relatively low in 2011: approximately one life insurer to one million

Romanians, a value which only exceeds the situation of Turkey (0.3 life insurers to one

million inhabitants) and of Poland (about 0.7 life insurers to one million Poles). Comparisons

with other countries in the region are striking: in 2011, the Czech Republic and Greece had

22 life insurers, but a significantly lower population than Romania, 10.5, respectively 11.3

million inhabitants. Slovakia had 21 life insurers, like Romania, but a population of 5.4

million. Finally, Hungary had 18 life insurers, with a population of approximately 10 million,

while 16 companies operated in Bulgaria, with a population of 7.3 million inhabitants.

4.4. Stability and performance indicators in the Romanian life

insurance sector Upon the request of the Competition Council, the companies active on the Romanian life

insurance market, as well as the Financial Supervisory Authority, provided information with

regards to the solvency, liquidity and profitability of the life insurance activity. This section

presents several indicators of stability and performance of the life insurance sector, focusing

on illustrating the overall situation (at market level).

It should be noted that the data used in this section refers to the 18 insurance companies

that were active on the market in September 2013 and were also under the supervision of

FSA (later 16 companies, after ALICO and EUREKO exited the market during the third quarter

of 2013, respectively the second quarter of 2014). This means that the life insurance sector

analysis of stability and performance avoids companies that have been taken over in the

past three years and those who exited the supervision of FSA (ARDAF, CARDIF, AEGON). The

estimated impact of these insurers on the market is reduced, however, both in terms of

NAF, and in terms of GWP, for which we do not consider the overall analysis provided below

as distorted.

Solvency

As regards the solvency of life insurance companies, we are particularly interested in the

relationship between the total available solvency margin and the minimum solvency

margin19, respectively the safety fund, when the latter is more relevant for comparisons (see

below). These three indicators are calculated based on the rules issued by the FSA and are

reported half-yearly by insurance companies.

19

The solvency margin is the amount of capital which the insurance company is obliged to permanently have, in order to remove the adverse effects of any unforeseen events. The total available solvency margin is calculated as the sum of several components and it corresponds to the total of unencumbered assets, excluding intangible assets. The central component of the total margin is the available solvency margin which, in turn, is determined as the sum of subscribed and paid share capital, of company provisions (other than technical provisions: capital premium provisions, reassessment, legal, statutory, conversion etc.), of the net result achieved and retained earnings, of which are deducted, among others, the amount of own shares directly held by the insurer, the value of shares held by the insurer in other insurers, reinsurers, insurance holding companies, credit institutions or investment firms, but also the value of intangible assets .

44

Figure 4.11. Half-yearly evolution of the total available solvency margin, minimum solvency margin and safety fund on the life insurance market in Romania during 2011-2014

Source: Own calculations based upon the information provided by active insurers on the market and under FSA

supervision

1,269

1,005

1,166

1,046

1,119

901

1,051

295 299 305 313 318 309 298280 286 287314 315 295 279

X/Y4.3

X/Y3.4

X/Y3.8

X/Y3.3

X/Y3.5

X/Y2.9

X/Y3.5

X/SF4.5

X/SF3.5

X/SF4.1

X/SF3.3

X/SF3.6

X/SF3.1

X/SF3.8

0

200

400

600

800

1,000

1,200

1,400

6L 2011 2011 6L 2012 2012 6L 2013 2013 6L 2014

mill

ion

RO

N

Total available solvency margin (X) Minimum solvency margin (Y) Safety fund (SF)

Under these rules, insurers authorized to provide life insurance are required to permanently

own a total available solvency margin at least equal to the minimum solvency margin,

determined individually for insurance companies20. In addition, for each insurer, the safety

fund is determined as the maximum value between one third of the previously described

minimum solvency margin and the RON equivalent of EUR 3.2 million (this minimum safety

fund is reviewed annually by FSA). Therefore, the companies for which the minimum

solvency margin has a low value (for example, because the company activity on this market

is limited), the safety fund required individually to each insurer by the supervisory authority

becomes the relevant indicator to be compared with total available solvency margin.

Figure 4.11 shows the evolution of the total solvency margin (marked X), the minimum

solvency margin (marked Y) and the safety fund (marked SF) in recent years, all of them

being aggregate at the level of active companies on the insurance market and under FSA

monitoring. In addition, the chart shows the ratio of the total available solvency margin and

the minimum solvency margin (marked X/Y and called the solvency degree), as well as the

ratio of the total available solvency margin and the safety fund (marked X/SF).

As can be seen, at aggregate level, the total available solvency margin more than covers

the life insurance activity, exceeding several times the minimum solvency margin and the

20

The minimum solvency margin is calculated as the sum of minimum margins for different types of life insurance offered by the company, starting from gross mathematical provisions established for each type of insurance, and considering their associated risks.

45

safety fund, which indicates the robustness of the Romanian life insurance sector. However,

note that the values shown in Figure 4.11 are aggregate values at market level, the

individual values of various companies exhibiting very high variability.

Since the variation coefficient values21 for variables X/Y and X/SF exceed70% during each

semester for the analyzed period, the average values of indicators X/Y and X/SF must be

examined with caution. What emerges as crucial is that the total available solvency margin

exceeds the minimum value and the value of the safety fund for each company active in the

market and in each semester of the period under review, which means that FSA has not had

to intervene explicitly to correct solvency issues during 2011-2014.

Liquidity

Companies active on the Romanian life insurance market have to send the regulator, on a

monthly basis, detailed statements on liquid assets and short-term bonds22, the FSA aiming

for liquid assets of insurance companies to exceed the bonds to which they may be

subjected in the near future.

Figure 4.12 below illustrates the quarterly statement of the two indicators, respectively

liquid assets (marked A) and short-term bonds (marked O), the situation being aggregated

at market level. As it can be easily seen, the total liquid assets comfortably exceeds the

level of short-term bonds, the liquidity ratio at market level, calculated as A/O ratio,

fluctuating between 4.4 and 5.1 during the analyzed period.

However, note that, as in the case of solvency of insurance companies, we are also dealing

with an aggregate indicator, calculated for the entire sector, which must be interpreted with

the required caution. This is because there are major differences in the size of the liquidity

ratio, both between insurance companies and, over time, for the same life insurer: the

minimum value of the VC calculated for each series of quarterly values is 50%, which shows

the data series are not exactly homogeneous, affecting the representativeness of the

calculated average values.

21

Briefly, the variation coefficient (VC) is an indicator of the series homogeneity degree, so, implicitly, an indicator on the relevance of the series mean. Calculated by dividing the standard deviation to the mean of the series and expressed in percentage terms, the VC generally compares with certain predetermined thresholds. Thus, VC<17% indicates a very homogenous series, whereas 17%<VC<35% indicates a homogenous data series. 22

According to FSA rules, liquid assets are represented by government securities held by the insurer, by the local government bonds, deposits with banks and credit institutions, by the cash at banks and on hand, the shares and bonds traded on regulated markets, but also equity interest in UCITS held by the company, while short-term bonds derived from 0.5% of the insured sums for death insurance, a maximum of 0.5% of the insured sums and 10% for surrender values for insurance covering the risk of death and is guaranteed a surrender value, 10% of the surrender values for insurance not covering the risk of death and is guaranteed surrender value and the net loss provision plus 50% of the part delivered to reinsurers from the gross loss provision.

46

Figure 4.12. Quarterly evolution of liquid assets and short-term bonds during January 2011 – June 2014

Source: Own calculations based upon the information provided by insurers active on the market and under FSA supervision

3,2233,336 3,269

3,167

3,459 3,533 3,561 3,493 3,504 3,563 3,628 3,694 3,669

3,870

738 743 738 723 732 747 767 758 767 776 783 797 781 765

A/O4.4

A/O4.5

A/O4.4

A/O4.4

A/O4.7

A/O4.7

A/O4.6

A/O4.6

A/O4.6

A/O4.6

A/O4.6

A/O4.6

A/O4.7

A/O5.1

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

3L 2011 6L 2011 9L 2011 2011 3L 2012 6L 2012 9L 2012 2012 3L 2013 6L 2013 9L 2013 2013 3L 2014 6L 2014

mill

ion

RO

N

Total liquid assets (A) Short-term bonds (O)

Profitability

Figure 4.13 shows the half-yearly evolution of the net earnings registered within the life

insurance sector during 2011-2014. Within this section, the market is seen through the

business of 17 companies, the information on profitability being unavailable for EUREKO.

Two basic components of the market level earning are illustrated, namely the net profit

made by most life insurers and the net loss incurred by some of the market participants

during this period.

To better understand the distribution of results achieved by life insurers, Figure 4.13 also

shows the number of companies reporting profit or loss during each semester of the

analyzed period (framed numbers). For example, during the first six months of 2014, the life

insurance business generated an aggregate profit, at sector level, of approximately 58

million RON. Of the 16 insurers active in this market, after ALICO’s exit, 10 companies

accounted for a total profit of approximately 87 million RON, while 6 insurance companies

registered a cumulative loss of approximately 29 million RON.

The data received by the competition authority shows that a distinct group of companies

constantly registered losses from the life insurance business. Probably due to the poor

results registered on an otherwise relatively profitable market segment, at least when

compared to the other segments of the insurance sector, some players decided to exit from

the Romanian life insurance market. Since some life insurance companies still appear to

register negative results from this activity increases the risk for other insurers deciding to

47

Figure 4.13. Half-yearly evolution of the net earnings from the Romanian life insurance sector during 2011-2014, separately indicating the profit/loss and the corresponding number of insurers

Source: Own calculations based upon the information provided by active insurers on the market and under FSA supervision

60.9

44.0

58.1

35.7

60.6

-2.9

57.8

90.4

113.0

87.0

113.6

98.2

79.986.9

-29.5

-69.0

-29.0

-77.9

-37.7

-82.8

-29.1

17 17 17 17 17 16 1613 12 11 12 11 10 104 5 6 5 6 6 6

-100

-50

0

50

100

150

6L 2011 2011 6L 2012 2012 6L 2013 2013 6L 2014

mill

ion

RO

N

Net result Profit Loss

exit the Romanian life insurance market, directly impacting the concentration degree of this

business sector.

4.5. Life insurances in Romania from a competition perspective Overview on life insurance in terms of microeconomic theory

For previously stated reasons, the study carried out by the competition authority focuses on

the two actual life insurance classes: class A.I (classical or traditional life insurances) and

class A.III (life insurances linked to investment funds). As follows, we will refer to the life

insurance market in Romania, represented by the two actual life insurance classes, without

this indicating that a relevant market for life insurance was defined, as this concept is used

in investigations of the competition authority.

The features of the life insurance market will be considered by means of the characteristics

of two descriptive market structures, namely monopolistic competition and oligopoly.

The monopolistic competition structure market resembles the perfectly competitive

market in terms of the large number of active firms and the ease of market entry (lack of

market-entry barriers). Unlike competitive market, however, the products offered by

various sellers have different characteristics (they are differentiated). Product heterogeneity

gives every seller some market power, which means that these companies are no longer

price acceptants, as in the perfectly competitive market, but are price-makers.

The oligopoly is a different type of market located between the extreme structures

represented by the perfect competition and monopoly. Unlike the monopolistic competition

48

market, which implies a large number of sellers, the oligopoly involves a small number of

sellers, protected from market entry of other competitors. A usually derived assumption is

that at least some market participants hold a significant share of it. Then, while the

monopolistic competition market offers for sale differentiated products, it is assumed that

companies which are active on the oligopoly offer for sale homogeneous products.

Barriers to entry The obstacles that companies must overcome to enter the market are an

essential element of the analysis, the barriers being one of the differentiators of the two

descriptive models of markets with imperfect competition. From our point of view, in case

of life insurance in Romania, market-entry barriers are of several types.

First, it is the capital and regulatory barriers imposed by the FSA, such barriers being

absolutely justified, due to the sensitivity of the contracts concluded on the life insurance

market. In short, regulatory barriers relate to the company mode of organization, including

its denomination, several approvals required and certain taxes paid by the company, as well

as the conditions imposed to founders or significant shareholders of the company. In

addition, FSA requires a minimum paid-up capital of life insurance companies, which should

exceed the value of the security fund or the amount of RON 12 million, as applicable.

In addition to the minimum paid-up capital, we believe that financial barriers also come

from the company's need to keep investing significant resources in marketing and

communication actions, but also to develop a specialized sales force. Furthermore, another

type of barriers to entry the market for life insurance is represented by less tangible

barriers, related to insurer reputation and access to distribution channels.

Because life insurance involves long-term agreements, which relate to purely personal and

sensitive issues (death, survival, saving, retirement), reputation is essential in this area, for

which, in our view, consumer perception on the reputation of life insurers is a barrier to

entry this market. As regards access to distribution channels, we consider a few things

invoked by insurers during preliminary discussions within this study. Thus, some market

participants have cited the difficulty to train and retain a competent sales force, life

insurance agents requiring special sales training. In addition, some insurers, especially those

who are not part of financial groups which include commercial banks, have noted the

difficulty to access the bancassurance channel.

For the purpose of assessing the difficulty to enter a market, the regulations in force can be

analyzed, but, most likely, this kind of analysis will omit other types of entry barriers

mentioned above. Therefore, we believe that a complete image of barriers to entry consists

both from the views of market participants and of the companies that have assessed the

appropriateness of entry, but have decided to avoid market-entry due to existing barriers.

Unfortunately, for this sector, we do not hold information on insurers that have intended to

enter the Romanian market during recent years but failed to do so as a consequence to

49

insurmountable barriers. Therefore, we only used the views of active insurers on the market

and those expressed by the sector regulator.

A request for information sent by the Competition Council at the end of 2013 to FSA and the

companies active on the Romanian life insurance market included some questions directly

focusing on the market-entry difficulty, classifying barriers under four types: regulatory

barriers, financial barriers, barriers generated by reputation, and barriers due to access to

distribution channels. The responses received show that participants on the Romanian life

insurance market, as a whole, consider barriers as not being very restrictive. However,

respondents indicated a slight strain on the conditions of access to life insurance market

during 2010-2013.

The previously-stated issue on respondent selection (namely that insurers who decided not

to enter the market were not included) makes the responses received by the competition

authority from market participants likely to be biased in the sense of mitigating barriers on

the life insurance market. In other words, the companies that had possibly considered

entering the Romanian life insurance market, but gave up precisely because of the

restrictions encountered, would certainly be more fervent than those operating on this

market. In addition, Figure 4.6 showed that the last three entries on the Romanian life

insurance market are relatively far, during the second quarter of 2012 (by ALICO, meanwhile

taken over by METROPOLITAN) and the second quarter of 2010 (by ERGO and UNIQA),

whereas during the period 2009-2014 accounted for exits from the market.

The recent trend of tightening access conditions for entry on the life insurance market can

be of concern at the Competition Council level. Given the particular importance of barriers

to entry from a competitive perspective, the competition authority will have to continue to

carefully monitor this sector.

The number of active companies on the market Figure 4.6 indicates a relative

concentration trend of the Romanian life insurance market, particularly within recent years.

From our point of view, the gradual reduction in the number of competitors on the life

insurance market validates the previous discussion on barriers to entry. In addition, even if

the current number of insurers active on the market is not very low, we showed that it is

still relatively low compared to countries in the region: the relevant comparison takes into

account the population size - in this regard, see Figure 4.10, as well as the corresponding

observations.

The competition authority concerns on the Romanian life insurance sector are powered by

the notice for exit of another insurer (AXA), and the medium and long term prospects.

Product homogeneity The product homogeneity degree, in this case of life insurances

offered by various companies, is another essential element of differentiation between the

50

models of oligopoly and monopolistic competition. The analysis in this direction is limited to

this point, since the views expressed are not confirmed by a consumer survey.

From our perspective, there is a significant difference between the life insurance

agreements offered by various market participants, both in terms of basic risks covered and

the additional risks that may be added to the same insurance. Finally, the additional options

that can be attached to life insurance agreements are another differentiator of insurance

products23.

This differentiation by life insurance attributes, sometimes called horizontal differentiation,

can also be supported by a qualitative differentiation of insurance products (vertical

differentiation). As an example, we can state the difficulties and obstacles expected by a

client from the life insurance company in case of occurrence of the insured event.

Moreover, some life insurance market participants appear to heavily invest for assuring the

idea of stability and certainty for the compensation.

As a conclusion on the three issues above, we consider that the life insurance market in

Romania borrows characteristics both from the oligopoly market structure (barriers to

entry and a relatively small number of competitors), as well as those of the monopolistic

competition (likely differentiation of products).

The concerns of the Competition Council stem from the concentration trend noticed in

recent years, which seems to be accompanied by a trend to raise higher entry barriers.

Subsequently, one of the authority’s concerns refers to the relative closeness of the life

insurance market to the oligopoly model, with all associated risks for consumers.

The close and continuous monitoring of the life insurance sector will show whether current

concerns are justified or not. For example, higher barriers to entry, exit of other insurers or

the emergence of a trend to standardize life insurance agreement would increase

competition concerns, while lowering barriers and, especially, the actual entry of other

insurers on the market will alleviate current concerns.

Measuring the concentration degree of the life insurance market

Generally, the numerical evaluation of the market concentration degree is done by

calculating specific indicators, which take into account the market shares of participants24 .

23

Several examples of options: the option for protection against inflation, which involves annual adjustment of the insured sum and the insurance premium based on the inflation rate, the option of increasing the insured sum, with a certain frequency and within certain limits, without further medical assessment of the insured party, the option obliging the insurer to pay premium payments in case of disability or suspended payment for a certain period. 24

The market share, generally determined both in terms of quantity and value, is considered to be a good indicator of market power of undertakings.

51

As follows, we will analyze the Romanian life insurance market concentration in terms of

concentration ratio25 and by using the Herfindahl-Hirschman Index26.

For above-stated reasons, the concentration degree analysis focuses solely on actual life

insurances, namely insurances in class A.I (traditional life insurance) and A.III (life insurance

with investment component) insurances. The values of insurer market shares are

determined depending on the gross written premiums, net after cancellation (GWP). From

our point of view, value market shares are more relevant to this market, as they take into

account the actual size of the insurance agreements. Moreover, the market shares

calculated based on the value of products are generally preferred in comparison to those

calculated based on the volume of products. This preference becomes obvious when

analyzed markets come from the service sector. Finally, the life insurance companies

considered are those under the FSA supervision, two local branches of insurers registered in

other European countries being excluded from analysis upon removal from under the FSA

supervision (the market impact of these two branches is still very low).

Figure 4.14 illustrates the evolution of the Romanian life insurance market concentration

degree during January 2011 - June 2014. The assessment of market share in terms of

premiums written by life insurers, method considered to be more eloquent in this case,

shows a recent acceleration of the concentration process on this market, the HHI value

increasing from approximately 1,700 in 2013 to reach 2,091 in June 2014.

25

Market as CRn, concentration ratios are calculated as the sum of individual market shares for the first n market participants. The CR3 indicator will remain the sum of market shares for the top three players on the Romanian life insurance market. The CR5 indicator will be calculated as the sum of the market shares for the top five life insurers, while CR10 will be the aggregate statement of the top ten players. Obviously, a higher concentration rate shows a market closer to the oligopolistic market model, stressing the worries of competition authorities with regards to the existence and impact of anti-competitive behaviours on the market in question. 26

Marked as HHI, this is the most commonly used indicator of competition authorities to assess the market concentration degree. HHI is calculated as the sum of the squares of the market shares for all participants, which means that the indicator values can range from very small, close to zero (perfectly competitive market) to 10,000 (for monopoly).

52

Figure 4.14. Half-yearly evolution of several concentration degree indicators on the life insurance market during January 2011– June 2014. The market shares used consider the gross written premiums of the analysed period.

Source: Own calculations based upon the information provided by FSA (for insurers under the supervision of the institution)

62

.3%

62

.9%

63

.5%

63

.3%

64

.0%

63

.4%

63

.3%

64

.6%

63

.0%

60

.0% 63

.8%

63

.3%

63

.5%

63

.8%

73

.8%

73

.9%

74

.0%

73

.9%

75

.3%

74

.8%

74

.0%

74

.9%

75

.4%

71

.4% 74

.9%

75

.0%

76

.4%

77

.4%

92

.8%

92

.6%

92

.5%

92

.5%

93

.7%

93

.7%

92

.6%

92

.8%

93

.5%

91

.5%

93

.7%

93

.2%

94

.7%

95

.4%

1,678

1,705 1,720 1,720

1,760 1,754

1,728

1,763

1,745

1,632

1,761

1,799

2,045

2,091

1,600

1,650

1,700

1,750

1,800

1,850

1,900

1,950

2,000

2,050

2,100

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3L 2011 6L 2011 9L 2011 2011 3L 2012 6L 2012 9L 2012 2012 3L 2013 6L 2013 9L 2013 2013 3L 2014 6L 2014

CR3 CR5 CR10 (left axis) HHI (right axis)

53

Moreover, in 2014, the value of HHI has exceeded for the first time the threshold of 2,000

units, which defines highly concentrated markets from the point of view of the European

Commission.

The chart shows that the concentration ratios that consider the first three, five or ten

competitors on the market are also on an upward trend during the reviewed period, the top

ten competitors controlling almost the entire market (95%) in June 2014, while the top five

players had a combined market share that exceeded 74%.

It is worth highlighting that the recent concentration trend of the Romanian life insurance

market takes place in a context of important changes in the presence of different players on

the market, what is most important being the consolidation of the position of a certain life

insurer, ING.

4.6. The assessment of the life insurance sector through the

Aggregate Index of Competitive Pressure The Aggregate Index of Competitive Pressure (hereunder AICP) is a working tool recently

developed by the members of the Economic Analysis Group with the Research-Analysis

Directorate of the Competition Council. AICP was first introduced in the institution’s 2013

report on the evolution of competition in the key sectors of Romania’s economy.

AICP is taken up and developed in this annual report, for which, for details on the composite

index, the reader is referred to chapter 3 on this economic analysis tool.

Regarding the Romanian life insurance sector, the assessment by means of the 20 primary

indicators underlying AICP leads to a composite index value that places the industry in the

middle group of the 21 industries examined in 2014. More specifically, the 40% AICP value,

calculated for the life insurance sector in 2014, lies exactly halfway between the group of

industries which are most inclined towards the free expression of competition (which

includes, for example, architectural services, and the distribution of cars and spare parts for

vehicles) and the group of industries more inclined to anti-competitive behavior (which

includes, for example, cement production and sale, notary services and freight and

passenger railway transportation).

Given the AICP value for life insurance in Romania, we can state that the risks to

competition in this sector are moderate, and that, if the case of anti-competitive behaviors,

the effects of these behaviors on consumers are expected to be of medium severity.

However, the AICP value calculated for 2014 is slightly lower than that for 2013 (39.7%

against 40.8%), due to the recent accentuation of the sector’s concentration trend. A

possible continuation of this trend can generate concerns on the competition authority.

54

4.7. Conclusions The analysis of the Competition Council on life insurance in Romania clearly shows the

recent decline of this economic sector, this decrease being obvious when the amount of

premiums for such insurance is expressed in real terms (adjusted for inflation). The reduced

development of the life insurance sector in Romania stands out when international

comparisons are made in this regard, Romania hovering behind the countries of the region.

The competition authority notes the recent trend of concentration of the life insurance

market, concentration being doubled by an apparent tightening of market access

conditions. Consequently, the Competition Council concerns are related to a relative

movement of the Romanian life insurance sector towards the oligopoly model, with all the

competitive risks that this approach entails. Given that market concentration trend comes

amid increasing market power of a particular insurer, the competition authority will have to

carefully monitor this sector.

This chapter only partially illustrates the issues highlighted within the competition

authority’s study on the Romanian life insurance sector, study which will be available soon.

55

5. THE BANKING SECTOR

5.1. An insight into the sector

Between 2010 and 2014, the number of credit institutions active on the Romanian market

remained relatively constant. Thus, at the end of the first semester of 2014, the Romanian

banking system consisted of 40 credit institutions, out of which nine are subsidiaries of

foreign banks, while in 2010 there were 42 banks operating on the market (out of which

nine were subsidiaries of foreign banks).

The main factors determining the dynamics of the number of competitors in the banking

sector are:

relatively high market-entry barriers;

relatively high market-exit barriers;

the macroeconomic environment, particularly incertitude as regards the main

indicators and public policies which impact the business environment.

On the other hand one can notice that, despite the stability of the number of financial

institutions, the sector’s concentration degree, measured both through the aggregate

market share of the first five banks, and through the Herfindahl-Hirschmann Index, has

decreased in the last years.

Figure 5.1. The evolution of concentration in the banking sector, 2007-2014

Source: National Bank of Romania

The process of increasing the return-on-investment of the Romanian banking system, which

started in 2013, continued in 2014. The chart below presents the evolution of two indicators

which are relevant in this respect, Return-on-Assets (ROA) and Return-on-Equity (ROE)27,

27

ROA = net annual profit/total average assets. ROE = net annual profit/average own capital

56,3

54,3

52,4 52,7

54,6 54,7 54,4 53,9

1046

926 857 871 878 852 821 806

50

51

52

53

54

55

56

57

0

200

400

600

800

1000

1200

2007 2008 2009 2010 2011 2012 2013 2014 (Jul.) CR5 - total assets (% - scale on the right) HHI - total assets (points -s cale on the left)

56

mentioning that the values presented below are average values determined for the entire

Romanian banking system.

Figure 5.2. The evolution of ROA and ROE, average values, March 2010 – June 2014

Source: The National Bank of Romania

The chart presents the rising trend of the ROE in 2014, the value this indicator reached in

March 2014 equals the maximum values reached in the same period in 2010 and 2011. Also,

one can notice a significant variation of the ROE between the minimum level reached in

2013 and the value in June 2013.

5.2. The crediting activity

The crediting activity is one of the most important activities of credit institutions in

Romania. We will now analyze the loans granted between March 2010 and March 2014, and

also the bad loans rate.

Figure 5.3. The evolution of bad loans, March 2010 – March 2014

Source: The National Bank of Romania

-6

-4

-2

0

2

4

6

8

ROA ROE

57

In the chart above one can notice that in the last four years the percentage of bad loans has

continuously increased, currently reaching 22.3% out of all granted loans. The main reason

for this is the economic crisis which caused that the high volume of loans granted between

2005 and 2008 to become bad, which affected both the population and the banking sector.

The next chart indicates the evolution of the interest difference between loans and deposits

in lei, between January 2010 and April 2014, indicating the trend of the difference between

new loans and interests to approach those in the balance.

Figure 5.4. The evolution of the interest difference between loans and deposits, 2010-2014

Source: Own calculations based on the input from the National Bank of Romania

Figure 5.5. The evolution of the difference of interest between loans and deposits in euro,

2010-2014

Source: Own calculations based on the input from the National Bank of Romania

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

Existing loans - Existing interest (total) New loans - New interest (total)

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

Existing loans - Existing interest (total) New loans - New interest (total)

58

In this chart, one can notice a decrease in the differences between the two margins in euro,

starting from 2013.It could be observed that there were small periods of time in which these

differences were negative, unlike the differences between the same margins in lei.

Figure 5.6. The evolution of interest margins between loans and deposits in the balance and

new ones, in lei, for households, 2010-2014

Source: Own calculations based on the input from the National Bank of Romania

As one can notice in the chart above, the difference between the two margins was higher

between 2010 and 2011 than in the following two years. Starting with 2013, the two

margins started to follow the same trend.

Figure 5.7. The evolution of interest margins between loans and deposits in the balance and

new ones, in lei, for non-financial corporations, 2010-2014

Source: Own calculations based on the input from the National Bank of Romania

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

Interest margin loans-deposits in the account (non-financial corporations)

Interest margin new loans-deposits (non-financial corporations)

59

Figure 5.8. The evolution of interest margins between loans and deposits in the balance and

new ones, in euro, for households, 2010-2014

Source: Own calculations based on the input from the National Bank of Romania

Figure 5.9. The evolution of interest margins between loans and deposits in the balance and

new ones, in euro, for non-financial corporations, 2010-2014

Source: Own calculations based on the input from the National Bank of Romania

The following can be noticed from the evolution of interest margins between loans and

deposits in the account and new ones for households:

the difference between loans and deposits margins in the account and new ones,

denominated in euro, remain higher than the difference between loans and

deposits, denominated in lei;

in 2012 there was a significant decrease of these margins, due to the intensification

of competition in the area of attracting resources (deposits) at sector level;

0,00

1,00

2,00

3,00

4,00

5,00

Interest margin loans-deposits in the account (households)

Interest margin new loans-deposits (households)

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

Interest margin loans-deposits in the account (non-financial corporations)

Interest margin new loans-deposits (non-financial corporations)

60

in the last part of the analyzed period one can notice an increasing trend of the

difference between the level of rate for loans and deposits in the account and new

ones, denominated in euro, against those denominated in lei, which show a

decreasing trend; a possible cause for this could be the policy of the National Bank of

Romania (BNR) to stimulate lending in the national currency in the detriment of

loans in foreign currencies.

As concerns the evolution of the interest margins between loans and deposits in the

account and new ones for non-financial institutions, the following can be noticed:

at the end of 2012 there was a decrease of these margins, due to the intensification

of competition in the area of attracting resources (deposits) at sector level, followed

by an increase in 2014;

between 2010 and 2011, the difference between loans and deposits margins in euro

were very low, with both positive and negative values;

starting with January 2014, the margins for new loans-deposits were higher than

those in balance, which can be caused by a reduction of competition in this sector.

The indicators most frequently used by banks to establish the variable interest rates are

ROBOR 3M and ROBOR 6M. ROBOR is the interest rate on placed deposits, and ROBID is the

interest rate on deposits. When determining variable interest rates in euro of loans the

indicators most used are Euribor 3M and Euribor 6M. The Euribor index is established

subsequent to a survey among 39 banks, which are supposed to submit estimates of the

cost of mutual financing for periods between one day and one year.

The evolution of reference interest, particularly ROBOR, has led to the overall decrease of

credit costs, which has not however led to a relaunch of credit due to the persistence of

macro-economic uncertainties and a consumer and investors’ prudent perception on the

economic environment.

Figure 5.10. The evolution of ROBOR and ROBID (3 months), between 2010 and 2014

Source: National Bank of Romania

61

5.3. Bank fees

In Romania, the level of bank fees is very high in comparison with other EU Member States.

A study of the European Commission conducted in 2009 indicates that Romania ranks fourth

among countries with the highest costs associated to a debit account28. The chart below

shows that, in Romania, such costs considerably exceed the average of the European Union,

the difference is approximately €50.

Figure 5.11. The average cost, in euro, of debit accounts in EU Member States, 2009

Source: The European Commission, Factsheets: Comparability of payment account fees29

The analyzed bank fees concern: monthly account management, issuance of the bank

statement, internet banking, debit card management, cash withdrawal (from ATM’s of the

issuing bank or other banks) and international transactions.

The table below presents the banking fees of the main banks in Romania, banking fees

charged to individual costumers. From this table, one can notice that, except for Marfin

Bank and Banca Transilvania, all the other banks charge at least 2.5 lei/month for basic

account management. Also, balance enquiry is charged by most banks, with the exception

of Piraeus Bank, Credit Europe Bank and Marfin Bank.

Most banks do not charge the issuance of a monthly statement, with the exception of

Banca Transilvania and Libra Internet Bank, where every bank statement issued is charged 1 28

The European Commission, 2009, PPP adjusted average prices in Eur: 2009 Data collection for prices of current accounts provided to consumers – Van Dijk Management Consultants (prices); Eurostat (price level indices) 29

http://ec.europa.eu/internal_market/finservices-retail/docs/inclusion/20130506-factsheet-1_en.pdf

62

leu, 0.5 lei respectively30. Apart from the two banks, credit institutions in Romania charge

solely for the issuance of a copy of the bank statement. These fees range between 1 leu

(OTP Bank) and reach a maximum of 10 lei (Banca Comercială Carpatica), with an average of

4 lei/statement.

Table 5.1. Monthly banking fees of the main banks in Romania

Bank

Account

management

Bank

statement

Balance enquiry – RON

card

Own ATM

Other

ATMs

BCR 4.5 RON 2 RON 0.2 RON 2.5 RON

BRD 0.80 EUR 1 EUR 0.5 EUR 1 EUR

BT 0 1 RON 0.3 RON 2 RON

Raiffeisen Bank 2.5 RON 2 EUR 0.3 RON

UniCredit Tiriac Bank 7.5 RON 5 RON 0.3 RON -

CEC Bank 2.5 RON 5 RON 0.3 RON 1.5 RON

ING Bank 2 RON 0 - 2.5 RON

Bancpost 2.5 RON 4 RON 0.3 RON 1.5 RON

Volksbank 3 RON 5 RON 0 -

Alpha Bank 2.5 RON 5 RON 0.5 RON -

Banca Românească 3 RON 5 RON 0.5 RON 1.5 RON

Piraeus Bank 2.5 RON 3 RON 0 0

Libra Internet Bank 2 RON 0.5 RON 1 RON 1 RON

ProCredit Bank 3 RON - 0.5 RON 0.5 RON

Credit Europe Bank 3 RON 5 RON 0 0

OTP Bank 5 RON 1 RON 0.3 RON 0.3 RON

Carpatica 2.5 RON 10 RON 1 RON 1.8 RON

Marfin Bank 0 3 EUR 0 0

Source: The banks

Also, the Internet Banking service, which is free in most European countries, is charged in

Romania with approximately 1 euro/month. The highest fee is levied by OTP Bank - €

1.5/month, but there are also banks where service is free: Unicredit Ţiriac Bank, Banca

Românească, Libra Internet Bank, Credit Europe Bank and Marfin Bank.

Table 5.2. Monthly banking fees of the main banks in Romania for the Internet banking

service

Bank Internet Banking

BCR 3 RON/month

BRD 1 EUR/ month

BT 1 RON/ month

Raiffeisen Bank 4 RON/ month

30

Starting from the second statement of the month, the first statement is free of charge.

63

UniCredit Tiriac Bank 0

CEC Bank 3 RON/month

ING Bank 3 RON/month

Bancpost 1 RON/month

Volksbank 3 RON/month

Alpha Bank 4 RON/month

Banca Românească 0

Piraeus Bank 2 RON

Libra Internet Bank 0

ProCredit Bank 3 RON/month

Credit Europe Bank 0

OTP Bank 1,5 EUR/month

Carpatica 3 RON/month

Marfin Bank 0 Source: The banks

Another important aspect related to bank fees is related to national and international

transactions. The table below presents the fees charged by the main banks in Romania for

cash withdrawals from debit cards in lei. Banca Transilvania, ING Bank and Marfin Bank are

the only banks which do not charge for cash withdrawal from own ATMs. Most banks charge

0.2%, and BCR and Bancpost charge the maximum amount of 0.25%.

As concerns cash withdrawal from the ATM of other banks, fees charged to individual

costumers vary quite significantly. The highest fee is again charged by BCR and reaches 1% +

6 lei, while the fee of most banks does not exceed 0.5% + 2.5 lei. The fees for international

transactions – cash withdrawals abroad – vary from one bank to another: all fees exceed the

1% threshold of the transaction value, to which a fix amount in lei or foreign currency is

added, depending on the bank. The maximum fee is 2% + 10 lei (Libra Internet Bank).

Table 5.3. Fees for national and international transactions levied by the main banks in

Romania for cash withdrawal – debit card RON31.

Banks

National transactions International transactions

Cash withdrawal – debit card RON Cash withdrawal – debit card RON Own ATM Other ATMs

BCR 0.25% min 0.5 RON 1% + 6 RON 1% + 6 RON

BRD 0.20% min. 0.5 RON 1% + 4 RON 1.5% + 10 RON

BT 0 0,5% + 2.5 RON 1% + 2.5 RON

Raiffeisen Bank 0.2%, min. 0.2 RON 1%, min. 2.5 EUR 1% + 2.5 EUR

UniCredit Tiriac Bank 0.2%, min. 0.5 RON 1% +2.5 RON, min. 5 RON 1.5 % + 7 RON

CEC Bank 0.10% 0.5% + 3.5 RON 1% + 2.5 EUR

ING Bank 0 0.5% + 2.5 RON 1% + 10 RON

Bancpost 0.25%, min. 0.25 RON 0.5% + 2.5 RON 1% + 2 RON, min. 8 RON

Volksbank 0.2%, min. 0.4 RON 0.5 %+ 2.5 RON 1%, min. 4 EUR

31

Fees valid on October 1st

2014.

64

Alpha Bank 0.20% 0.5% + 2.5 RON 1%, min. 4 EUR

Banca Românească 0.2 %, min. 2 RON 0.5% + 2.6 RON 1% + 2 USD

Piraeus Bank 0.20% 0.5% + 2.5 RON 1% + 5.5 RON

Libra Internet Bank 0.20% 0.75% + 2.5 RON 2% + 10 RON

ProCredit Bank 0.20% 0.5% + 2.5 RON 1% + 2.5 EUR

Credit Europe Bank 0.20% 0.5 % +2.5 RON 1% + 10 RON

OTP Bank 0.20% 0.5 % +2.5 RON 1% + 10 RON

Carpatica 0.20 %, min. 0.5 RON 0.5 % +2.5 RON 1% + 3 EUR

Marfin Bank 0 1% + 2.5 RON 1.5%, min. 10 RON Source: The banks

The table below presents fees charged by banks for cash withdrawal from a debit card in

foreign currency, i.e. euro. In the network of own ATMs, fees do not vary as much as inter-

bank fees, as happens in the above-mentioned case.

Table 5.4. Fees for national and international transactions charged by the main banks in

Romania for cash withdrawals, euro debit cards

Bank

National transactions International transactions

Cash withdrawal – euro debit card Cash withdrawal – euro debit card Own ATM Other ATMs

BCR 1.75% min. 5 EUR 1.75% min. 5 EUR 1.75% min. 5 EUR

BRD 0.20% min. 0.5 RON 1% + 3 EUR 1.5 % + 3 EUR

BT 0.20% 0.5% + 1 EUR 1%, min. 2 EUR

Raiffeisen Bank 1.5%, min. 1 EUR 1.5% + 1 EUR 1% + 2.5 EUR

UniCredit Tiriac Bank 0.2%, min. 0.5 RON 1% +2.5 RON, min. 5 RON 1.5 % + 7 RON

ING Bank 0.20% 0.5% + 0,75 EUR 1% + 2.5 EUR

Volksbank 0.2%, min.0.4 RON 0.5% + 3 RON 1%, min. 4 EUR

Alpha Bank 0.20% 0.5% + 2.5 RON 1%, min. 4 EUR

Piraeus Bank 0.20% 0.5%+ 0.7 EUR 1% + 2.5 EUR

Libra Internet Bank 0.20% 0.75% + 0.6 EUR 1%, min. 2 EUR

ProCredit Bank 0.20% 0.5% + 2.5 EUR 1% + 2.5 % EUR

Credit Europe Bank 0.20% 0.5% + 0.75 EUR 1% + 3 EUR

OTP Bank 0.20% 0.5% + 0.7 EUR 1% + 3 EUR

Carpatica 0.2%, min. 0.2 EUR 1 % + 0.7 EUR 1% + 1.5 EUR

Source: The banks

Even though most banks maintain the 0.2% fee for every transaction, one can notice a slight

increase of fees in the last part of the analyzed period. The most significant change is that of

fees charged by BCR (from 0.2% min 0.5 lei to 1.75% min 5 euro), followed by Raiffeisen

Bank (from 0.2% min. 0.2 lei to 1.5% min. 1 EUR). These are actually the highest fees

charged for cash withdrawal from own ATMs. As regards using ATMs from other banks, fees

are much more varied than in the case of cards in lei. The same can be noticed from the

analysis of fees for international transactions. Banks which stand out with highest fees are

BCR, BRD and Raiffeisen Bank.

65

5.4. National and communitary initiatives concerning inter-bank

fees

As regards debit cards, both at the level of the European Commission and Member States, a

series of competition problems have been identified, particularly in connection to inter-

bank fees.

At national level, the Competition Council conducted a sector inquiry32 in order to identify

possible anti-competitive practices on the market of card payments and possible distortions

of this market, which act against consumer welfare. The enquiry highlighted several

important competition issues on the national market of debit cards, among which the

manner in which inter-banking fees are determined and the level of these fees for the

Romanian card market.

In order to identify the best solution whereby these inter-banking fees should be

significantly reduced, the Competition Council initiated discussions with government

authorities and representatives of the business environment, concerning the need to adopt

regulations in order to cap the inter-banking fee; these regulations could benefit consumers,

through the reduction of sale prices (transfer to consumers of savings generated at retailers

from the reduction of inter-banking fees).

As a result of these actions and in order to ensure consistency between the trend at

European level and national provisions, the Ministry of Public Finances, in cooperation with

the Competition Council, drafted a law for strengthening financial discipline on cash

collection and payment operations, including the capping of inter-bank fees at 0.2% for

debit cards and 0.3% for credit cards. A 6-month period of grace was introduced until the

implementation, and these caps apply to transactions between accepting banks and issuing

banks operating in Romania. However, commercial card operations, ATM cash withdrawals

and operations with cards issued by tripartite card payment systems are exempted. Fines

will be imposed on undertakings which fail to observe these caps.

The draft law, approved by the Government (April 2nd 2014) with the positive endorsement

of the Legislative Council and BNR, is under debate in the Senate. In order for it to take force

the project must be approved by the Chamber of Deputies, the decision-making forum.

Concerns of the European Commission meant to contribute to enhancing consumers’

mobility and, therefore, stimulate competition in retail banking:

The Regulation draft on inter-bank fees for debit operations using the card provides that, in

the first phase, inter-bank fees can be capped for cross-boundary transactions from 0.2% of

the transaction value for debit cards and 0.3% for credit cards, and, in the second phase (2

32

Completed in May 2013.

66

years after the regulation comes into force) the fee cap should also apply to operations with

debit and credit cards respectively.

The Regulation draft concerning inter-bank fees for debit operations with cards was

debated in the European Parliament on April 3rd 2014 (first lecture). The adopted

amendments included:

Capping inter-bank fees for cross-boundary transactions from 0.2% of the transaction

value, without exceeding 7 eurocents/transaction, for debit cards;

Capping inter-bank fees for cross-boundary transactions from 0.3 % of the transaction

value, for credit cards;

The caps will apply simultaneously both to cross-boundary and national transactions,

one year after the publication of the regulation;

The above-mentioned provisions apply to commercial cards, as well as operations with

cards issued by tripartite card payment systems, should their volume exceed the

threshold established by the Commission.

The vote of the European Parliament and the European Union Council will follow.

At the same time, in tight coordination with the proposal on inter-bank fees for card

payment operations, as well as for the creation of a legal framework that is fully consistent

with the EU policies and objectives, the Commission proposed for amendment: The

Directive project on payment services in the internal market, to amend Directives

2002/65/CE, 2013/36/UE and 2009/110/CE and repeal Directive 2007/64/CE (DSP).

Main objectives: (i) facilitate the establishment of an environment of fair competition

between incumbent providers and new-comers on the market of card, internet and mobile

devices payment services, (ii) increase efficiency, transparency and options in the area of

payment tools for users of payment services (consumers and retailers) and (iii) ensure high

level protection of the latter category.

These objectives can be achieved by updating and amending the existing framework for

payment services, i.e.:

Ensure legal security in the area of inter-bank fees for card payments and ensure

transparency of a business model acceptable for current and future card payment

initiatives (the Regulation project on inter-bank fees for card payment operations);

Removal of restrictive commercial rules for card payments which lead to market

distortions (the Regulation draft on inter-bank fees for card payment operations);

Harmonize the policies of Member States on over-taxation, in line with the regulatory

decisions in the area of inter-bank fees (the Regulation draft on inter-bank fees for card

payment operations);

Define conditions of access to information on the availability of funds for third-party

providers, including providers of payment initiation services (the DSP application area);

67

Adjust the scope of and increase the consistency of the legal framework (the DSP

application area);

Improve the application of existing DSP (DSP adjustment measures);

Adapt the current directive33 to the provisions in Directive 2014/92/EU of the European

Parliament and the Council of Europe on the comparability of fees related to payment

accounts, payment account switching and access to payment accounts with basic

features;

Maintain a balance between the high level of consumer protection and the

undertaking’s competitiveness, thus preventing retailers from applying fees higher than

actual costs, for using payment tools (Directive 2011/83/EU of the European Parliament

and Council of October 25th 2011 on consumers’ right, to amend Council’s Directive

93/13/CEE and Directive 1999/44/CE of the European Parliament and Council to repeal

Council’s Directive 85/577/CEE and Directive 97/7/CE of the European Parliament and

Council);

The aspects presented above impact consumers, payment service providers and the

payment service market as a whole.

On April 3rd 2014, the European Parliament voted a series of amendments to the proposals

of the European Commission. The project is negotiated by the European Parliament, the

European Commission and the EU Council.

Directive 2014/92/EU of the European Parliament and Council on the comparability of fees

related to payment accounts, payment account switching and access to payment accounts

with basic features.

Main objectives:

Comparability of fees related to payment accounts with basic features

Fees can be compared provided that payment services providers use a standardized

terminology accompanied by specific information pertaining to fees associated to the most

representative payment services and presented in a coherent format, easy to understand by

consumers.

In order to answer the needs of consumers it is necessary to guarantee that information

related to fees applicable to payment accounts is accurate, clear and comparable.

In order to obtain unbiased information concerning bank fees, consumers should have

access to comparison websites which are independent, from an operational perspective,

from payment services providers.

33

Directive 2007/64/EC of the European Parliament and Council of November 13th

2007 on payment services

in the internal market, transposed at national level through EGO 113/2009 on payment services.

68

Comparison websites can be operated by competent authorities, other public authorities

and/or certified private operators. Member States must establish a voluntary certification

program whereby private operators of comparison websites should have the possibility to

request certification according to a set of specific criteria.

These websites can insure the correct balance between the need for the information to be

clear and concise, but, at the same time, complete and comprehensible, offering users the

possibility to obtain more detailed information because this is what they are interested in.

Using these websites can also reduce analysis-related costs, since consumers will no longer

need to collect information separately from payment services providers.

In every Member State, there should be at least one internet website at consumers’

disposal.

Access to payment account with basic features

Through the provisions in the Directive, consumers in the EU are entitled, without the

obligation for them to be residents of the country where the service provider is based and,

regardless of their financial situation, to open a payment account which allows them to

conduct basic operations, such as collecting salaries, pensions, pay utility invoices etc.

Every Member State must make sure that at least one payment service provider, offers such

an account on its territory.

Member States will decide whether payment accounts, with basic features, should be

offered to consumers free of charge or at a reasonable tariff. At national level, a reasonable

tariff should be established, based on a set of criteria, such as the level of domestic income,

average fees paid for an account in the Member State and costs associated with the

provision of payment accounts.

Transfer of payment accounts with basic features

In order to have a positive impact on competition, the directive provides clear and

expedient procedures which do not entail an excessive administrative and financial burden

on consumers.

Payment services providers will have to provide consumers with appropriate information

concerning their rights to transfer their bank account and the procedure they should follow

in this respect. These services will be made available free of charge.

According to the Directive, the payment account with basic features includes the following

payment services: (a) services which allow all the operations required to open, operate and

close a payment account; (b) services which allow the cash-in to a payment account; (c)

services which allow for cash withdrawal on the EU territory: direct debit, payment

operations with a debit card, including online payments, credit transfer.

The deadline to implement the Directive at national level is September 18th 2016.

69

5.5. Conclusions

The comparative analysis of the trend of interest against the situation of fees for banking

services covering most customers indicates a much higher market power of banks against

debit card holders and a relatively low competition level generated by the flat level of fees.

An important reason for this situation is represented by high barriers for consumers in the

form of switching costs (particularly in the case of debit cards). Under these circumstances,

the initiatives aiming at the increase of the pro-competitive character of regulations,

especially through the elimination of switching barriers (e.g. portability of bank accounts), is

highly important from the perspective of the national competition authority.

70

6. THE MOBILE TELECOM SECTOR

The mobile telecom sector is under the close monitoring of the European Commission,

through the ‘Digital Agenda for Europe – A Europe 2020 Initiative’ project. The main

objective of this project is to help citizens and economic operators in the EU Member States

benefit from all changes happening in digital technology. In this respect, the European

Commission developed the Connected Continent34, legislative package, whose goal is to

create a single telecom market. Some of the proposals refer to incentives for increasing

investments in the 4G technology, the development of the mobile internet wireless

network, standardization of landline products, elimination of roaming charges, as well as

enhanced consumer protection through more advantageous and transparent contracts.

As concerns the roaming tariffs, 2014 has brought a series of important changes for

consumers. The ‘Eurotariff’ imposed by the European Commission defines the maximum

tariff that an operator acting on the European market of mobile telecom can charge to its

customers for roaming services. On July 1st 2014 this tariff suffered a new decrease, as

presented in Table 6.1.

Table 6.1. Maximum tariffs for calls, SMS and data traffic

July 1st 2012 July 1st 2013 July 1st 2014

Made call (per minute) €0.29 €0.24 €0.19 Received call (per minute) €0.08 €0.07 €0.05 Sent SMS (per SMS) €0.09 €0.08 €0.06 Data traffic (per MB**) €0.70 €0.45 €0.20

Source: The European Commission; Your Europe The cap imposed is calculated per MB, although operators charge per kilobyte; tariffs include VAT.

This decrease was felt on the phone services market in Romania on which operators

introduced new roaming options and tariff plans.

Not only roaming charges are under the scrutiny of regulators, but also interconnection

charges. The goal of the ‘Connected Continent’ legislative project is to increase the pan-

European services offer, and to this purpose, it is important to decrease interconnection

charges. One can notice that, in the last decade, these charges have decreased by

approximately 86% at European level. This is due to decisions made by telecom regulators in

EU Member States.

34

http://ec.europa.eu/digital-agenda/en/connected-continent-legislative-package

71

Figure 6.1. Interconnection charges at EU level January 2005 – January 2014

Source: European Commission – Digital Agenda for Europe

Also, the goal of the ‘Digital Agenda for Europe’ is to protect consumers. The possibility for

portability is a means to achieve this goal. The implementation and improvement of this

service increases the competitiveness of market operators, as well as the consumers’

bargaining power.

All decisions made at European level in the ‘Digital Agenda for Europe’ project clearly impact

the Romanian mobile telecom market. This is why a comparative analysis of the main

indicators on the Romanian and European markets is required.

6.1. The mobile telecom sector in Romania

Currently, the Romanian mobile telecom market includes four operators, i.e. Orange,

Vodafone, Telekom Romania and RCS&RDS; their number decreased after the takeover of

Telemobil by Cosmote in 2009. As of September 2014, Cosmote and Romtelecom have

communicated under the Telekom Romania brand (integrated service operator).

The services provided by the operators are voice, SMS, as well as data traffic services. Due

to the fast development of technology in the area of telecom, the regulations of this market

are undergoing numerous amendments. These aspects intensify the dynamism degree of

the mobile telecom market. On the other hand, considering the high penetration degree of

SIM cards, the mobile telecom market can be deemed to have reached maturity.

The evolution of the market

Analyzing all the data referring to the total number of active users of mobile telecom in

Romania, one can notice that in the last years, the market of mobile telecom services has

had a slight decrease, follow by stagnation in the last four semesters. Nevertheless, both the

voice traffic initiated and ended in mobile telecom networks in Romania are continuously

12,81

11,39 10,45

9,01

7,79

6,49

4,92 4,01

2,34 1,80

0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mobile Interconnection Charges at EU level

- 85.9%

72

increasing. One can notice that the traffic volume initiated by the end users, even though on

a rising trend, has had a lower level in comparison with previous years.

Figure 6.2. Number of active users and penetration rate of SIM cards per 100 people

Source: ANCOM

Note: The penetration rate of SIM cards is calculated according to the result of the 2011 census

This decrease is reflected in the penetration rate of active SIM cards, the level at the end of

2013 was 3% lower than three years prior. This contradicts the evolution of the average

penetration rate of SIM cards in the European Union, which has increased since 2004. Apart

from the decrease of the penetration rate of SIM cards, one can also notice an increase of

data traffic generated by end users to other mobile phone networks than their own. This

increase may the consequence of regulations to reduce interconnection charges

implemented by ANCOM in recent years.

73

Figure 6.3. The annual evolution of voice traffic ended in mobile phone networks in Romania

Source: ANCOM

Figure 6.4. Annual of voice traffic generated in mobile phone networks in Romania*

Source: ANCOM

4442

5952

7290 7697

8176

8954 9466

10678

+ 34%

+22.4%

+ 5.6% + 6.2%

+ 9.5%

+ 5.7%

+ 12.8%

0

2000

4000

6000

8000

10000

12000

2006 2007 2008 2009 2010 2011 2012 2013

Number of minutes ended in own network (mil. min.) Evolution (percentage)

* roaming excluded

74

Despite the decrease of the penetration rate of SIM cards in Romania, it continues to

exceed the 100% level, which proves that, on average, each user uses at least one SIM card.

An explanation for this phenomenon may be the high termination tariffs in any network

levied by operators prior to 2011. Between these tariffs and those for terminating calls in

one’s own network there is a considerable difference, thus consumers are forced to

purchase the competitor’s pre-paid or post-paid packages.

Figure 6.5. Penetration rate of SIM cards at EU level, October 2004 – October 2013

Source: European Commission – Digital Agenda for Europe

Figure 6.6. Penetration rate of SIM cards and voice traffic in other networks in Romania

Source: ANCOM

Concentration degree of the mobile telecom sector in Romania

In comparison with other EU Member States, the Romanian mobile telecom sector should

present a lower concentration degree, considering the higher number of operators. The

total number – 4 operators – is similar to the average of the European Union, and the

84,6 95

103,2 111,8

118,3 121,9 122,7 127,3 130,6 131,6

0

20

40

60

80

100

120

140

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

%

75

countries with more mobile telecom operators are: Poland – 6 operators, Denmark and

Sweden – with 5 operators each.

Figure 6.7. Number of mobile network operators, October 2013

Source: European Commission – Digital Agenda for Europe

However, an analysis of the Herfindahl–Hirschman Index shows that the concentration

degree of the mobile phone market in Romania is high, exceeding by far the 2000-unit

threshold used frequently by competition authorities. The HHI index has not changed

significantly in recent years; its values have increased slightly on each of the three calculated

dimensions. The voice traffic index shows the highest increase, its level reached 3,818 in

2013.

Figure 6.8. The concentration degree of the mobile phone market, 2010-2013

Source: ANCOM

The stability of the HHI Index is due to the stability of the market shares of big mobile

network operators in Romania. Even though it has not changed significantly for three years,

the leader’s market share is raising, against his smaller competitors whose market shares

0

1

2

3

4

5

6

CY

BE

BG

EE

EL

HR

LT

LU

HU

MT

NL

AT

PT SK

CZ

DE ES

FR

IE

IT

LV

SI

FI

UK

EU

RO

DK

SE

PL

76

have decreased. According to BEREC (Body of European Regulators for Electronic

Communications), at the end of January 2014, the market leader had a market share of

approximately 43%, the main competitor 29.2%, while the remaining 27.8% was divided

between the other operators (most of which belonged to a company with a market share of

22.8%). Market shares are determined depending on the number or active SIM cards.

Figure 6.9. The market share of mobile network operators in Romania, October 2011-

October 2013.

Source: European Commission – Digital Agenda for Europe

35

At European Union level, statistics at the end of 2013 show that the market leader holds an

average market share of approximately 35.4%, 7% lower than the mobile telecom market in

Romania. Also, the leader’s market share has decreased since 2010, considering data at EU

level. In exchange, alternative operators (‘other competitors’) have strengthened their

positions in recent years and, at the end of 2013, they had an average market share of

35.9%, thus succeeding to exceed the market share of the market leader. These effects are

due to regulations on number portability and call termination tariffs, as well as the

aggressive commercial policy of second rank competitors (e.g. RCS&RDS). As a consequence,

the situation at EU level seems to be more balance than in Romania, where the market

leader is detaching itself from competitors.

However, in comparison with other EU Member States, Romania does not stand out as a

market with significant concerns related to the leader’s market share, like in the case of

Cyprus, where the market leader holds 70%, or Greece and Holland where the market

leader holds 50% (European Commission, 2012). Nevertheless, both in Romania and other

EU Member States, the first two mobile network operators hold approximately two thirds of

overall users, which indicates a high concentration degree of the market.

35

HHI active SIM cards – depending on the market shares determined based on the overall number of users HHI voice traffic – depending on the market shares determined based on the generated voice traffic (roaming excluded) HHI SMS traffic – depending on the market shares determined based on the text volume (SMS)

77

Figure 6.10. The market share of mobile network operators at EU level, October 2004 – October 2013

Source: European Commission – Digital Agenda for Europe

6.2. The evolution of inter-connection charges

Inter-connection charges on the mobile telecom market in Romania have decreased

continuously in recent years through regulations imposed by ANCOM. At the beginning of

2014, after a series of changes, these tariffs decreased much below the European Union

average and Romania ranked 25th among European countries with the lowest inter-

connection charges.

Thus, from a competition perspective, the low level of these charges can represent an

intensification of competition and a decrease of market-entry barriers of virtual mobile

network operators (MNVOs). According to ANCOM, a virtual mobile network operator

(MVNO) is defined as an entity which provides electronic communication services to mobile

phone users, without the need to hold a license to use radio frequencies and without

owning all network elements and/or the infrastructure required to provide mobile telecom

services.36 By concluding an agreement, they can obtain access to an incumbent operator’s

network, paying bulk tariffs for the services used.

On the retail market, virtual operators have the possibility to establish their own tariffs,

independent from those of the host operator. Currently, Romania is part of that category of

European countries on whose telecom market there is no virtual operator. According to

data available on the European Commission website, this is opposed by countries such as

the Czech Republic (58 MNVOs) or Holland (52 MNVOs). The presence of these operators

36 ANCOM (2012): Regulation guidelines on the activity of virtual network operators on the electronic

communication market in Romania

78

contributes to the increase of competitiveness on the mobile phone market, and, at the

same time, the decrease of the concentration degree of this market.

Figure 6.11. UE inter-connection charges – January 2014 (including România – RO) and

Romania’s situation in April 2014 (RO*)

Source: European Commission – Digital Agenda for Europe

Table 6.2. The evolution of inter-connection charges regulated by ANCOM

Mobile network operator Regulated inter-connection charges for termination on mobile phones*

From May 1st

2009

From Jan. 1st

2010

From July 1st

2010

From March 1

st 2012

From Sept. 1st

2012

From April 1st

2014

Orange Romania S.A. 5.03

4.05 3.07 0.96

Vodafone Romania S.A.

Cosmote RMT S.A. 6.40 5.67 5,03

Telemobil S.A. 6.40 5.67 5,03

RCS & RDS S.A. 7.21 6.40 5,67

Romtelecom S.A.

*Euro-cents/ minute; charges do not include VAT.

Source: ANCOM

After the reduction of inter-connection charges in April 2014, the operators’ cost to provide

minutes for calls to any phone networks has decreased considerably. In comparison with the

regulated tariffs on March 1st 2012, costs have decreased by approximately 76.3%. For

example, if in March 2012, the cost associated to providing 100 minutes to any operator’s

network reached €4.05, as of April 2014 the provision of the same service costs only €0.96.

The reduction of inter-connection charges operated in the last year amounts to

approximately 68.7% from 3.07 eurocents/minute to 0.96 eurocents/minute. In the

following period, it will be worth monitoring the trend of termination charges on the retail

market to see whether operators will reduce it. Moreover, such a reduction can facilitate

the market entry of virtual network operators. As a consequence, consumers can benefit

directly from the reduction of call termination charges in any network, as well as indirectly,

through an increase of competitiveness due to the entry on the market of several operators.

0,8

00

0,8

00

0,8

96

0,9

60

0,9

80

1,0

09

1,0

13

1,0

16

1,0

23

1,0

25

1,0

43

1,0

90

1,1

80

1,1

89

1,2

26

1,2

70

1,2

90

1,3

14

1,5

65

1,6

81

1,7

33

1,7

90

1,8

61

2,0

70

2,3

74

2,6

00

2,8

00

3,0

70

3,2

40

8,5

76

0

1

2

3

4

5

6

7

8

9

10

FR

AT

DK

RO

* IT

UK

CZ SE

BG

PL LT

ES

BE EL

SK

PT EE

UE LV

HR

CY

DE

NL

MT

HU

IE

FI

RO

SI

LU

Euro

cen

ts/m

in.

79

6.3. Number portability

The introduction of the number portability service in October 2008 has led to a series of

benefits for the mobile telecom market. For example, the consumers’ bargaining power has

increased, which fosters market competition. Alongside, incumbent operators were forced

to offer more and more advantageous packages, so as to maintain or even increase their

customer base.

The chart below shows the evolution of the numbers ported in recent years. One can notice

that between 2009 and 2013, the number of annual number ported on the mobile phone

market increased by approximately 73%, the overall number of ported reached 201,000 in

2013. ANCOM statistics indicate that 80% of those who use the portability service have

subscriptions, and only 20% of them use pre-paid cards.

As concerns the distribution of ported numbers, ANCOM has established a ranking of

operators depending on the mobile phone numbers received into a network since this

service became available. Statistics made public at the end of 2013 indicate that Vodafone

S.A. obtained most ported numbers, out passing the market leader, Orange S.A.

Figure 6.12. The evolution of the annual ported numbers on the mobile phone market,

2009-2013

Source: ANCOM

80

Figure 6.13. The first four operator according to the numbers received, 31.12.2013

Source: ANCOM

6.4. The activity of the Competition Council in the mobile telecom

area

The main activities of the Competition Council in the electronic communication sector

finalized in 2014 with (pro)active involvement:

Issuing Guidelines for the interpretation and application of art. 5 paragraph (2) in

Competition Law no. 21/1996 republished, with further amendments and

supplements, on the co-investment agreements, i.e. shared use of mobile telecom

networks (hereunder called the Guidelines)

Considering, on one hand, economic efficiencies, i.e. pro-competitive effect which can

derive from the implementation of such agreements and, on the other hand, the associated

anti-competitive effects, the Competition Council considers that is useful and appropriate to

issue Guidelines for the interpretation and application of art. 5 paragraph (2) in Competition

Law no. 21/1996 republished, with a general character, which should offer undertakings

operating in the electronic communication sector in Romania an overview on the approach

of shared use of mobile telecom networks by the national competition authority, i.e. the

general analysis and assessment framework thereof.

In order to have a coherent and fair approach to these types of agreements from the

perspective of the competition law, the national competition authority has decided to

submit the Guidelines for public debate37, as well the analysis of these Guidelines conducted

by the World Bank.

The Guidelines published38 on the Competition Council’s official website relate to the

agreements between providers of network and mobile telecom services which include

37

The Competition Council’s official website, March - April 2014. 38

For details, the updated format (13.06.2014) can be downloaded at: http://www.consiliulconcurentei.ro/ro/documente-oficiale/concurenta/recomandari-indrumari.html

288.424

270.652

254.646

8.299

Vodafone

Orange

Cosmote

RCS & RDS

81

provisions referring to the share use of infrastructure assets which are part of the electronic

communication network they operate (i.e. passive or active infrastructure elements), as well

as the shared development and use of such assets.

Concerning the general analysis framework, undertakings should consider the fact that

horizontal agreements on the shared use of electronic communication networks do not fall

under the incidence of art. 5 paragraph (1) in the Competition Law, respectively article 101

(1) TFEU, unless they meet all the four requirement/criteria39 in art. 5 para. (2) in the

Competition Law, respectively art. 101 para. (3) TFEU, i.e.:

Criterion 1: the agreement should improve production or distribution or promote technical

and economic progress;

Criterion 2: the agreement, i.e. restrictions it provides should be indispensable for reaching

the scope of the agreement;

Criterion 3: Consumers must obtain a reasonable part from the benefits derived by the

parties subsequent to the implementation of the agreement;

Criterion 4: The agreement must not offer the parties the possibility to eliminate

competition on a significant part of the product market in question.

Also, in order to better guide undertakings interested to conclude agreements for the

shared use of networks and agreements for joint investment in the development and shared

use of networks (or specific infrastructure elements), the document raises competition

concerns which may appear on the relevant markets and markets associated thereto

through the implementation of such horizontal agreements as well as relevant aspects that

must be considered when analyzing and assessing possible competition issues (risks) which

may appear subsequent to such agreements.

The investigation launched through the order of the President of the Competition

Council no. 403/22.02.2011 concerning the possible infringement of provisions

under art. 6 para. 1. letter c) in Competition Law no. 21/1996, republished, and

further amendments and supplements and the provisions under art. 102 in the

Treaty for the Functioning of the European Union by S.C. Orange România S.A., S.C.

Vodafone România S.A., S.C. Cosmote Romanian Telecommunication Mobile S.A.,

S.C. RCS & RDS S.A., mobile network operators in Romania, on the market of call

termination to mobile phones in the individual network of each operator.

The competition concerns on which the investigation is based are related to possible anti-

competitive effects – both on the competition between the providers of mobile phone

services, landline services respectively (as concerns the landline-mobile convergent

services), as well as on end-users – because of the differences between the level of the call

39

The general framework of analysis and the four criteria are detailed in the document.

82

termination service on mobile phones in the network operated by each undertaking

partially provided to the bulk market (in order to make off-net calls, i.e. calls in the network

of the undertaking in questions initiated/originated by end users of other telecom

providers; in this case, voice traffic does not leave the network, it occurs in the same

network). The difference in question can represent the manner to employ anti-competitive

practices (i.e. margin squeeze, ruining prices, cross-subsidy of the offer on the retail price

from income generated on the bulk market which affects competition on the retail market).

Subsequent to the request of the operators in questions, the Plenum of the Competition

Council accepted to start the commitment procedure, and will conduct the market test

between August – September 2013.

As concerns the character and content of the commitment offer on the retail market

proposed by the parties, we must underline that, during the inquiry, mobile network

operators started introducing all-net and flat-rate offers based on independent tariff plans

(the first one was Vodafone, shortly followed by Cosmote). At first, these offers were

premium offers. In time, such offers have become increasingly attractive and accessible to

an increasing number of end-users; this trend was enhanced by the recent coming into force

of the new maximum MTR regulated by ANCOM, of 0.96 eurocents/minute (on April 1st

2014). Under these circumstances, the undertakings considered that they needed sufficient

freedom for action as concerns the concrete content of the offers on the retail market

which are part, together with the principles, of their commitment proposal (practically,

offers must transpose into the market the principles that the parties undertook to observe).

Moreover, the undertakings introduced all-net and flat-rate offers on the market with a

lower or similar price to offers which are part of the commitment proposals.

Subsequent to the analysis of the commitment proposals reformulated by the undertakings

between March – April 2014, the Competition Council rejected the proposals, but expressed

availability to accept new commitments, which should address directly the concerns which

have determined the start of the investigation.

The activities for the transfer from terrestrial analogue television to terrestrial digital

television

According to the Geneva 2006 Agreement signed by Romania and the Strategy adopted by

the Government, in Romania, the transition process from terrestrial analogue television to

terrestrial digital television must finish before June 17th 2015. On June 17th 2015, any

terrestrial analogue television broadcast shall cease and will be replaced by terrestrial digital

television broadcast of TV programs and additional multimedia services.

After five years of monitoring the transition period from the terrestrial analogue television

to the terrestrial digital television and the implementation of digital multimedia services at

83

national level, with effects in interventions and endorsements on the numerous strategies40

and normative act projects including the organization of competitive / comparative

allocation procedures, this year, based on the latest Strategy41 issued by the Ministry for the

Informational Society, The National Authority for Management and Regulation in

Communications in Romania (ANCOM) finalized42, together with industry representatives,

the decision and the tender specifications for organizing the tender for terrestrial digital

television in Romania.

The Competition Council was involved in the endorsement process of projects of normative

acts concerning the strategy, tender specifications and in the process concerning the

granting of licenses for using radio frequencies in the terrestrial digital television system.

The Competition Council also expressed an opinion concerning the conditions to participate

in the competitive process.

Subsequent to the competitive selection procedure, out of the five terrestrial digital

television multiplexes43, four in UHF and one in VHF, in the DVB-T2 standard, three

multiplexes were granted to Societatea Naţională de Radiocomunicaţii S.A. (SNR), i.e the

’free to air’ multiplex and two other (commercial) multiplexes in the UHF band.

The licenses are granted for 10 years and will become valid as of June 17th 2015. Through

the first ‘free to air’ UNHF multiplex (MUX 1), SNR had the duty to broadcast under

transparent, competitive and non-discriminatory conditions, public and private TV channels

currently broadcast in a terrestrial analogue system, according to the Law of the audio-

visual. Also, this multiplex shall cover 90% of the population with fix reception and 80% of

the territory by December 31st 2016. For the other granted multiplexes, SNR shall, before

May 1st 2017, commission 36 transmitters for each of the networks associated to these

multiplexes, one per allocation area.

40

Starting with the project Decision to approve the policy and strategy Document on the transition from terrestrial analogue television to terrestrial digital television and the implementation of digital multimedia services at national level, of March 2009 41

The strategy on the transition from terrestrial analogue television to terrestrial digital television was approved on July 19

th 2013 in the Government meeting.

42 Based on the transition timetable dated October 2013, at the end of 2013 the government decision project

was submitted for public consultation; this government decision establishes the license tax and the procedure to be used for granting licenses, the decision project on the procedure to grant multiplexes, as well as the tender specifications. 43

The digital multiplex is a group of radio and television programs, additional multimedia services and other associated broadcast from transmission stations to end-users via terrestrial radio transmission, using digital modulation within the limits of a standard television channel / frequency block.

84

6.5. The Effects of the Implementation of Commitments

Concerning the Distribution of Mobile Phone Pre-paid

Products

I. The context of the adoption of commitments concerning the distribution of mobile

phone pre-paid products

In June 2012, the Competition Council accepted the commitments assumed by Orange

România SA (Orange), Vodafone România SA (Vodafone), Cosmote Romanian Mobile

Telecommunications SA (Cosmote) and their distributors of mobile phone pre-paid products,

as part of the investigations started at the end of 2009.

In a normal competitive environment, the product / service provider must not restrict the

right of the distributor to establish an independent business strategy (including the re-sale

price, the territory where they sell the products, customers they sell products to).

Competition concerns related to:

- The direct or indirect control of resale prices;

- Market sharing (depending on the territory or categories of customers);

- The existence non-competing obligations in contracts;

- The arbitrary manner to select distributors and sub-distributors.

The aggregate effects of the distribution contracts with provisions concerning similar

restrictions covered the entire market in Romania. In order to remove these concerns,

measures to amend contract provisions were needed for all distribution systems of mobile

phone pre-paid products.

The commitments assumed by mobile network operators and their distributors were

considered sufficient to remove the competition concerns which had led to the

investigations and contribute to a faster restoration of the competitive environment on the

entire market in Romania.

The implementation of the commitments assumed by the parties has led to the

improvement of access of undertakings to the market of distribution of pre-paid products,

and distributors’ awareness was raised concerning the right to establish their business

strategy independently, knowing the limits between which providers can negotiate

contract provisions with these undertakings.

85

II. Consumers’ perception on the level of prices and competition

Competition concerns in this case related to the commercial relations between the mobile

network operators and their direct distributors, and direct distributors and sub-

distributors. Thus, the concerns of the Competition Council related to the measures to

control prices by mobile network operators and their direct distributors. They do not refer

to the retail price of prepay products to end-users.

However, according to customer satisfaction studies conducted during the monitoring

process, the result is that end users are very satisfied with prepay products, including

price.

On a scale from 1 to 10, approximately 80% of the users are completely satisfied or very

satisfied with these products (scores of 9 and 10).

In comparison with 2012, in 2014 prepaid card users are much more satisfied or more

satisfied with services provided by mobile network operators (59% of Orange users, 67% of

Cosmote users and 70% of Vodafone users).

Criteria to select the mobile network operator

The most important two reasons for changing the mobile network operator are the quality

of coverage and the network used by acquaintances/friends.

Price ranks third, promotional offers fourth and the distribution system fifth.

According to the analysis of the data provided during the monitoring process, the

competition concerns related to charging a fix price to end consumers were eliminated.

Currently, retail prices of prepay products vary (including prices of products belonging to

the same mobile network operator), which indicates that price-competition is present on

this market.

As, in the monitoring period, the content of a product suffered important changes (e.g. in

2013 in comparison with 2011, the 5-euro card included a double number of minutes, text

messages in the own network, and data traffic), it is difficult to identify, beyond all doubts,

the influence of commitments concerning the final price of these products.

III. The assessment of the impact of commitments related to competition concerns

1. The competition issue – Resale price control

The Competition Council was concerned that, regardless of the price type (maximum,

recommended) established in the distribution contracts, when selling to the end consumer

it will operate as a fix price.

86

1.1 The assumed commitment and its effects

In the case of every operator, there were provisions in the distribution contracts

whereby the resale price was influenced.

The parties undertook to amend the distribution contracts (on the entire distribution chain)

so that they would no longer include recommended, maximum resale prices, exchange rates

or elements to recommend prices. Moreover, in the distribution contracts of PrePay

services, provisions will be included to stipulate the fact that distributors have full freedom

to decide on the product / services resale price.

The targeted outcome was the elimination of the provider’s involving with the

establishment of the resale price.

The data and information submitted in the monitoring reports indicate that, on the

distribution chain to the end consumer, prices of prepaid mobile phone products are

changed depending on the policy of each undertaking. Thus, the price used by outlets

belonging to the same outlet chain can differ depending on the location of the outlets in

question, proving that decisions regarding the price of prepaid mobile phone products and

services are made based on the prices used by points of sales in the immediate vicinity and

the competitive pressure applied thereby, and prices are not established at central level.

The effect of this commitment is that, currently, distribution contracts no longer include

recommended or maximum resale prices, reference prices, exchange rates upon

invoice/delivery, fixing the trade markup. Distributors are free to decide concerning the

resale price of PrePay products.

The data and information submitted in the monitoring reports indicate that, on the

distribution chain to the end consumer, prices of prepaid mobile phone products are

changed depending on the policy of each undertaking.

2. The competition issue – market sharing depending on the territory of categories

of customers

Provisions were identified in the distribution contracts, according to which:

- distributors were requested to declare the sale volume achieved at every point of sale;

- a certification system was established, by the operator, of sub-distributors and points of

sale.

The assumed commitment and its effects

The undertaking undertook to amend the distribution contracts down to the end-user, so

that their partners should have full freedom to sell prepay products, without prior approval,

subsequent limitation or monitoring, in order to restrict territories or points of sale.

As concerns the outlets where distributors sell the providers’ products, from the perspective

of competition rules, it is important that the product provider should not intervene in any

87

way in the territorial, numerical or any other type of development of the retail points of sale

of its distributors.

The target effect was that distributors should have the freedom to independently

establish the territory where they develop their distribution network.

The effect: contract provisions allowing mobile network operators to intervene in the

territorial, numerical or any other type of development of the points of sale of their

distributors were eliminated. Currently, distributors can decide on the locations where

they resell products.

3. The issue – non-competing contract obligations

During the investigation, one discovered the existence of contract provisions whereby the

sub-distributor undertook not to place terminals in locations belonging to traders who have

already concluded a contract with the direct distributor or partners thereof.

The assumed commitment and its effects

Contract provisions whereby the sub-distributor undertakes not to place terminals in

locations belonging to the traders who have already concluded a contract with the direct

distributor or partners thereof were eliminated.

As concerns the effects of applying the commitment, distributors are free to trade the

products. Prepay products are sold to any customer, regardless of distributors or point of

sale, without the need for direct or indirect approval of the mobile network operator.

4. Concerns related to the discretionary manner to select distributors / sub-

distributors

The absence of a transparent selective distribution system gives the possibility to incumbent

mobile network operators/distributors to raise artificial market-entry barriers or for

maintaining the supply system of mobile phone prepay products.

The assumed commitment and its effects

Both mobile network operators, as well as their distributors of mobile phone products

undertook to provide in such a way was as to apply a set of transparent and non-

discrimatory principles and rules when selecting distributors / sub-distributors (equal

benefits will be granted to those economic agents in equal situations).

These rules were included in easy accessible procedures for any applicants who wish to join

the distribution network.

The effect – both the number of direct distributors of mobile network operators, as well as

the number of sub-distributors increased in the analyzed period; this proves that the

selection procedures adopted facilitated the entrance into the distribution/sub-distribution

88

system, contributing to the increase of competition in the area through the increase of the

number of undertakings in the system.

Distribution systems are dynamic in nature and there are both distributors/sub-distributors

entering the market and achieving important purchase volumes (for one, two or three

mobile network operators), as well as undertakings exiting the analyzed market; thus, direct

operators/direct distributors cannot hold captive distributors/sub-distributors, which can

switch the prepay product provider relatively easy whenever this is for their benefit.

6.6. The Assessment of the Mobile Telecom Sector through the

Aggregate Index of Competitive Pressure

As concerns the AICP assessment of the Romanian mobile telecom sector, the value of the

index calculated for 2014 is 36%. This value places mobile telecom in the lower part of the

middle group of analyzed sectors.

It is worth highlighting that the value of the aggregate index calculated for the mobile

telecom sector has had the most significant increase out of the 21 industries analyzed

through the AICP, being 3 percentage points higher in 2014 against the previous year. The

aspects deemed to have increased the pro-competitive pressure in this sector are the

market operators’ apparent intensification of marketing and communication actions, the

increase of the market share of the maverick competitor and higher openness towards

innovation.

Obviously, from the perspective of the competition authority, the intensification of such a

pro-competitive processes is desired, and should such trends continue, they will be included

in the AICP calculation.

6.7. Conclusions

Even though, from a structural perspective, the mobile telecom industry is very close to the

oligopoly structure market model, because of the relatively low number of undertakings

active on the market and, subsequently, the high concentration degree, product

homogeneity and market-entry barriers, there are important structural, but also behavioral

elements, which represent significant sources of competitive pressure. The main factors

counterbalancing the oligopoly-type structure of this industry are: the significant impact of

the maverick competitor, the exposure of the market to innovation, as well as intense

marketing and communication activities.

The cooperation between the market regulator, ANCOM, and the national competition

authority represents an interaction model with positive outcomes on competition, in

general, and on consumers, in particular. This finding is supported by the comparative

analysis of the Romanian mobile telecom industry with the situation in the other EU

Member States.

89

7. THE RENEWABLE ENERGY SECTOR

7.1. The Importance and Evolution of the System to Promote the

Production of Energy from Renewable Sources

Law no. 220/2008 on the establishment of the system to promote the generation of

renewable energy stems from Parliament initiative whose goal was to stimulate the interest

of producers of renewable energy to invest in Romania44, considering the important and

diversified potential of our country in the area of renewable energy sources.

Even though it took force in November 200845, Law no. 220/2008 could not be applied

because authorities in charge, i.e. the Ministry of Economy, Commerce and Business

Environment (MECMA) and the National Authority for Energy Regulation (ANRE), at the

request of the Competition Council, agreed that the aid scheme established state-aid

measures which can solely be enforced after the aid scheme was notified to the European

Commission and obtaining an authorization decision from the community forum.

Thus, in 2009 Government Decision no. 1479/200946 was issued in order to establish the

system to promote the production of electricity from renewable energy sources, which

provides that the promotion system regulated through Law no. 220/2008 will solely be

applied after the approval of the European Commission, until which an older aid scheme,

which became valid in 2004, would apply.

The support process of renewable energies in Romania did not start with Law no. 220/2008,

as before the coming into force of the measures included in this law, a legal framework had

been in force; this framework included similar provisions, i.e. Government Decision no.

1892/200447 on the establishment of the system to promote the generation of electricity

from renewable sources.

However, the state aid measures established in 2004 through the above-mentioned law

proved in time to be insufficient to reach the national target of 33%, 35% and, respectively,

38% of the electricity percentage produced from renewable energies of the electricity gross

final consumption, for years 2010, 2015 and 2020, which has determined the Romanian

authorities to reconsider the state aid scheme and adopt additional measures to support

this sector, which took substance in Law no. 220/2008.

44

The production of electricity from renewable sources entails much higher costs in comparison with

conventional energy but presents the advantage of environment protection through the elimination of fumes

and the saving of natural resources. 45

Published in the Official Journal of Romania, Part I, issue 743 of November 3rd 2008. 46

Published in the Official Journal of Romania, Part I, issue 843 of December 7th 2009. 47

Published in the Official Journal of Romania, Part I, issue 1056 of November 15th 2004.

90

The issuing of the authorization decision by the European Commission took longer to

analyze, which determined the extension of the application of measures established

through GD no. 1892/2004 until Decision EC C(2011) 4938 was issued and EGO no.

88/201148 came into force which amended and supplemented Law no. 220/2008.

Figure 7.1. The aid scheme established by Law no. 220/2008 and the main resulting

amendments

As a consequence, as presented in Figure 7.1, since Law 220/2008 came into force, it has

been amended and supplemented several times, including the republishing49 of Law no.

220/2008 in 2010, the approval of this law through EC Decision C (2011) 4938 of the

European Commission, as well as the amendment and supplement of this Law through EGO

no. 88/201150, through Law no. 134/201251, through EGO no. 57/201352, through GD no.

994/201353 and Law no. 23/201454.

7.2. The Aid Mechanism

Law no. 220/2008 established the legal framework for the extension of the use of

renewable energy; the beneficiaries of this scheme are producers of electricity from

48

Published in the Official Journal of Romania, Part I, issue 736 of October 19th 2011. 49

Published in the Official Journal of Romania, Part I, issue 577 of August 13th 2010; 50

Published in the Official Journal of Romania, Part I, issue 736 of October 19th 2011; 51

Published in the Official Journal of Romania, Part I, issue 505 of July 23rd 2012; 52

Published in the Official Journal of Romania, Part I, issue 335 of June 7th 2013; 53

Published in the Official Journal of Romania, Part I, issue 788 of December 16th 2013; 54

Published in the Official Journal of Romania, Part I, issue 184 of March 14th 2014;

91

renewable sources which produce electricity from: hydro, wind, solar, geothermal sources,

biomass, bio liquids, waste fermentation gas and sludge fermentation gas from waste water

treatment plants.

The opportunity of the aid scheme

The production of energy from renewable sources presupposes higher costs in comparison

with the production of energy from conventional sources. As a consequence, the price at

which producers of renewable energy could sell the produced energy on the electricity

market, in the absence of additional aid (green certificates), would be much higher than that

of conventional energy, which would make the production of this type of energy not-

sustainable through producers’ own forces.

As a consequence, the benefit of this aid, under the form of green certificates, is deemed

absolutely necessary in order to ensure the presence of producers of renewable energy on

the market. The sale of green certificates to electricity providers ensure additional income

to producers of renewable energy in order for them to cover the higher costs they bear in

relation to using renewable sources of energy.

The functioning of the aid system

In essence, in its current form, the system to promote the production of energy from

renewable sources established through Law no. 220/2008 establishes the system of

compulsory energy quotas combined with the trading of green certificates55. This system

presupposes the granting of a preset number of so-called green certificates to producers of

electricity from renewable sources, simultaneously with imposing the obligation on

electricity suppliers to annually purchase a number of green certificates equal to the

multiplication of the value of the compulsory quota to purchase green certificates

established for the year in question by the amount of electricity supplied to end consumers

on an yearly basis.

Compulsory annual quotas were set at a level which would allow Romania to reach the

national targets for 2020 as provided by Directive 2009/28/EC on the promotion of the use

of energy from renewable sources. Subsequent to the amendment of Law no. 23/2014,

according to art. 4 para. (42) in Law no. 220/2008, ‘between 2015 and 2020, the compulsory

annual quota of electricity produced from renewable energy sources, which benefits from

the promotion system though green certificates, is established on an yearly basis and

approved through Government decision, at the proposal of the Department for Energy

within 60 days since it is communicated by ANRE”. Through the legal framework, Romania

has assumed the target to have 24% renewable energy out of the final bulk consumption by

2020.

55

Government Decision no. 1892/2004 presuposed, in essence, the same state system, the number of green certificates allocated for the produced and supplied energy being, however, lower.

92

The promotion system provided in Law no 220/2008 applies to electricity from renewable

sources, supplied to the electric grid and/or directly to consumers, including the electricity

produced during the commissioning phase of group/electricity plants, as well as electricity

used for own consumption locations connected to the plants’ bars (except for own

technological consumption). The system is applicable exclusively to plants or groups which

have been/will be commissioned/refurbished before the end of 2016.

The functioning of the promotion system established by Law no. 220/2008 is presented in

the figure below.

Figure 7.2. The functioning of the green certificate system

Source: CE Decision CE C (2011) 4938

Green certificates are granted to producers monthly by the Transport and System Operator

– Transelectrica - the National Company for the Transport of Electricity, for the electricity

produced and supplied to the electricity networks of the National Electricity System and/or

directly to consumers. Green certificates received by the beneficiary can be traded on the

centralized market of green certificates and on the market of green certificates bilateral

contracts, within 12 months (the validity period of certificates).

93

Green certificates trade value

The trade value of green certificates on the green certificate centralized market is

established through competitive mechanisms and, according to the law, falls within the

range of 27 EURO/certificate (minimum value) and 55 euro/certificate (maximum value).

The same price limits are imposed to bilateral transactions, as well. As of 2011, these price

limits have been indexed annually by ANRE, depending on the inflation calculated for the

previous year in the euro area, as officially communicated by EUROSTAT.

The law provides that, should providers fail to reach the compulsory certificate quota,

determined on the number of green certificates purchased and the electricity supplied to

end users, they shall pay the amount for the green certificates not purchased, 110 euro for

every certificate not purchased. The amount is collected by OTS and become an income to

the Environment Fund56, in order to finance the production of renewable energy by

individuals who invest in plants with a maximum installed capacity of up to 100kW.

Access to market

According to art. 14, para. (7) in Law nr. 220/2008 ‘the transport and system operator

and/or distribution operators ensure the transport, respectively distribution, as well as the

priority dispatching of electricity produced from renewable sources, for all producers of

energy from renewable sources’.

Also, according to art. 14 para. (8) in Law no. 220/2008: ‘for the electricity benefiting from

the aid system provided [by Law no. 220/2008], contracted and sold on the energy market,

guaranteed access to the grid is provided, except for the electricity which is contracted and

sold at a regulated price”.

Under these circumstances, producers of renewable energy who benefit from green

certificate promotion system are certain that the entire amount of produced electricity is

taken-over and sold on the market, sometimes for the detriment of other traditional

sources of energy production, except for cases in which the stability and security of the

National Energy System could be jeopardized.

Number of green certificates to be allocated:

Beneficiaries receive the number of green certificates established through Law no.

220/2008 during the period of the aid scheme, depending on the technology employed and

renewable source employed, as presented in Table 7.1. For the test period, GC/MWh is

granted, regardless of the source of renewable energy.

56

Established through Emergency Ordinance no. 196/2005, and further amendments and supplements.

94

Table 7.1. Number of green certificates granted and length of aid

RENEWABLE SOURCE Type of plant/group GC/MWh Length

(years)

(1) HYDRO power – used in plants with

installed powers of ≤10 MW

new57 3 GC

(reduced by 0.7 GC)* 15

Refurbished 2 GC 10

Not refurbished –

commissioned prior to

Jan. 1st 2014

0.5 GC 3

(2) WIND power New

2 GC until 2017

(reduced by 0.5 GC)*

1 GC since 2018

(reduced by 0.25

GC)*

15

(3) SOLAR power new 6 GC

(reduced by 3 GC)* 15

(4) GEOTHERMAL power new 2 GC 15

(5) BIOMASS, BIOLIQUIDS, BIOGAS. new 2 GC 15

(6) Waste fermentation gas new 1 GC 15

(7) Sludge fermentation gas from waste

water treatment plants

new 1 GC

15

Electricity produced in high efficiency

cogeneration groups, through technologies

(4), (5), (6), (7)

new

1 additional GC 15

Biomass from energy crops new 1 additional GC 15

*according to amendments brought by Decisions no. 994/2013

Budget and application length

The length of the notified measure is up to the end of 2016, which is the deadline by which

new beneficiaries can enter the system. According to art. 3 para. (2) in Law no. 220/2008,

the promotion system established through this law applies for a period58 of 15 years for new

plants, 10 years for modernized/refurbished hydro-electric plants, 3 years for existing (not

refurbished) hydro-electric plants and 7 years for reused plants.

57

New plants are, according to art. 2 letter g) in Law no. 220/2008, those electricity plants commissioned after January 1

st 2014, consisting pf 100% new equipment.

58 According to art. 3 para. (8) in Law no. 220/2008, in the case of producers of renewable energy who

benefitted from green certificates prior to the application of the promotion system laid down by Law no. 220/2008, the application periods will diminish ‘proportionally to the periods for which they benefitted from green certificates’.

95

As concerns the estimated budget for the application of the state aid scheme established by

Law no. 220/2008, the EC Decision C(2011) 4938 of the European Commission provides the

amount of 80.713 billion lei (approx. 19.5 billion euro) for the entire period. The table below

presents the forecasted levels for the estimated annual budgets (including the total

estimated value of green certificates for the entire aid period for contracts concluding in the

year in question):

Table 7.2. Estimation of the budget required to sustain the aid scheme

Year 2011 2012 2013 2014 2015 2016 Total

Budget

(million lei) 23.305 13.902 14.504 10.666 9.322 9.015 80.713

Source: EC Decision

Subsequent to the application of the measures to reduce the aid level, including adjustment

measures subsequent to over-compensation, the budget for the state aid scheme was

adjusted to 78.135 billion lei.

7.3. The green certificates market

As presented above, the system to promote the production of energy from renewable

sources established through Law no. 220/2008, stipulates two income sources for producers

of electricity from renewable sources: income from the sale of electricity on the market59

and income from the sale of green certificates60.

The system provides that every producer of renewable energy who benefits from the aid,

should receive a specific number of green certificates, differentiated according to the type

of technology, for every MWh produced and delivered into the system.

Through the sale of green certificates to electricity suppliers, producers of renewable energy

have additional income for covering higher costs related to using renewable energy sources;

these costs could not be covered solely from the sale of electricity at market price.

As concerns this system, the EC decision provides that ‘the electricity market and the green

certificates market are separate and function independently’.

59

Art. 14, para. (1) in Law no. 220/2008 provides that ‘producers of electricity from renewable sources sell the electricity on the electricity market at market price’. 60

Art. 10 in Law no. 220/2008 provides that: “producers and suppliers of electricity from renewable

sources will trade green certificates on the centralized market of green certificates, as well as on the

market of bilateral contract of green certificates”.

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Thus, one can notice the fact that the market of green certificates’ is complementary to that

of electricity production and trade, the purpose of issuing and trading green certificates is to

allow energy produced from renewable source to have a competitive price.

Electricity produced from renewable sources

The market of production and trade of electricity includes energy production on electricity

plants and the energy imported through inter-connections in order to be sold to other

economic operators or end users.

According to the Report on the outcomes of the monitoring of the electricity market,

published by ANRE, the market of electricity producing and trading in Romania, is made up

of a mix of production resources mainly based on coal (approx. 28.34%), heating oil

(approx. 0.7%), gas (approx. 20.89%), nuclear (approx. 19.04%), wind (approx. 6.89%), hydro

(approx. 24.30%) and solar (approx. 0.47%). The evolution of the percentage of renewable

energy in the final gross electricity consumption is presented in the table below:

Figure 7.3. Evolution of the renewable energy percentage in the final gross electricity

consumption

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

The monthly evolution in the last three years of the structure on types of sources of the

electricity supplied into the grid by producers with dispatch able units is presented in the

figure below:

97

Figure 7.4. The monthly evolution of the structure depending on the type of resources of

the electricity supplied into the grid

Source: ANRE, The report on the outcomes of the monitoring of the electricity market in February 2014

The green certificates market

As presented above, the aid scheme established through Law no. 220/2008 represents a

system to promote the production of energy from renewable sources, based on which

producers of renewable energy are granted green certificates and they must purchase these

green certificates.

The GC offer is given by the number of GC issued by OTS to producers of energy from

renewable sources. GC can be traded, in a competitive system, on the GC bilateral contract

market (PCBCV) and/or on the GC centralized market (PCCV), between producers of energy

from renewable sources and electricity suppliers to end users and is not conditioned by the

trading of the associated electricity.

Compulsory annual electricity quotas from renewable sources

Compulsory annual quotas were established at a level which should allow Romania to

achieve the national targets by 2020 as provided in Directive 2009/28/EC on the promotion

of use of energy from renewable sources. Subsequent to amendment brought by Law no.

23/2014, according to art. 4 para. (42) in Law no. 220/2008, ‘between 2015 and 2020, the

compulsory annual quota of electricity produced from renewable energy sources, which

benefits from the promotion system though green certificates, is established on an yearly

basis and approved through Government decision, at the proposal of the Department for

Energy within 60 days since it is communicated by ANRE’.

The percentage of electricity from renewable sources which received aid in 2013 was 11.1%

from the final gross electricity consumption, under the 14% level, as legally established for

98

2013. The figure below presents the comparative trend of the compulsory annual quotas of

electricity produced from renewable sources which benefit from the promotion system

through green certificates and amounts achieved, between 2010 and 2013.

Figure 7.5. Compulsory annual quotas of electricity produced from renewable sources

which benefit from the GC promotion system

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

Compulsory renewable energy purchase quotas, for suppliers

Thus, on a yearly basis, electricity suppliers must purchase a certain number of green

certificates, whose level is established, for every year, by ANRE. The level of obligation

corresponds to the compulsory quota of energy from renewable sources established for the

year in question, multiplied with the electricity amount (MWh) annually supplied to end

consumers.

Compulsory annual quotas are established at a level which should allow for the reaching of

the compulsory national targets for 2020 provided in Directive 2009/28/EC61 on the

promotion of use of energy from renewable sources. The figure below presents the trend of

the compulsory annual quotas of GC purchase and GC purchase levels reached by electricity

suppliers to end consumers, between 2005 and 2013.

61

At national level, Romania’s energy strategy for the period 2007-2020, approved through Government

Decision no. 1069/2007, established the level of national targets on the percentage of electricity produced

from renewable sources from the final consumption of electricity at 35 % (2015) and 38 % (2020).

99

Figure 7.6. Compulsory annual quotas of GC purchase between 2005 and 2013

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

Green certificates can be traded by producers of electricity from renewable sources to

suppliers both of the green certificates centralized market, as well as through bilateral

contracts. The trade framework of green certificates, on the Green Certificate market, is

ensured by the ‘Electricity Market Operator - OPCOM’, according to ANRE regulations.

The market shares of GV buyers on the green certificate market for 2013 are presented in

the figure below.

Figure 7.7. Market shares of green certificate buyers

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

100

Table 7.3. Annual average values of

C1 and HHI

Year C1 HHI

2005 94% 8931

2006 90% 8153

2007 39% 2407

2008 43% 2741

2009 41% 2620

2010 36% 1853

2011 41% 1927

2012 21% 1029

2013 18% 908

Source: The ANRE report on the

monitoring of the functioning of the

system to promote electricity produced

from renewable sources in 2013

The GC market shares of producers who benefitted from GC in 2013 are presented in the

figure below.

Figure 7.8. Market shares of producers who benefited from GC

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

The table below presents the annual average values of C1 structure indicators (the market

share of the biggest renewable energy producer benefiting from GC, expressed as a

percentage) and HHI determined on the number of GC issued to producers of renewable

energy between 2005 and 2013.

Thus, the market share of the biggest producer of

renewable energy decreased from 94% in 2005 to

18% in 2013, given the increase of investments on

this market and the entry of new competitors. This

has led to a more fragmented market structure; the

HHI value in 2013 was only 908, a value under the

1800 threshold, which separates markets with

moderated concentration of the market power from

those with excessive concentration.

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Size of the green certificates market

The renewable energy promotion system was applied in 2014 for 6279 GWh produced

electricity, for which 12,612,322 GC were issued, out of which 10,133,040 GC for trading

and 2,479,282 GC postponed from trading.

The income collected, reported by producers of renewable energy from the sale of GC for

2013, was approx. 1,663,000,000 lei (376 million euro).

Segmentation of the green certificate market, depending on the trading manner

The green certificates issued in 2013 to electricity producers from renewable sources were

offered and traded on the two market segments, as follows:

- 51.83% on the green certificates centralized market (PCCV),

- 42.69% on the green certificates bilateral contract market (PCBCV).

The remaining 5.48% was transferred from the producer account into the supplier account,

for the same economic operator with a double function, both as a renewable energy

producer and supplier.

Segmentation of the green certificate market, depending on the renewable source type

The segmentation of GC issued for trade depending on the type of renewable energy

source, in 2013, was, as presented in the figure below: 64.41% - producers from wind

sources, 11.12% - producers from hydro sources, 18.93% - producers from photovoltaic

sources and 5.54% - producers from biomass, including waste fermentation gas plants.

Figure 7.9. Segmentation of the green certificate market, depending on the

renewable source

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

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Green certificates trading price

On the Green Certificate Centralized Market (PCCV), in 2013, green certificates were traded

at an average price of 190.71 lei/GC, i.e. 42.66 euro/CV, while on the Green Certificates

Bilateral Contract Market (PCBCV); green certificates were traded at an average price of

204.31 lei/GC, i.e. 46.23 euro/GC.

The structure of the income of producers of renewable energy

The unitary income of producers of renewable energy who benefited from the promotion

system in 2013, had an average value of 93.5 euro/MWh, i.e. 413.2 lei/MWh. The trend of

the structure of the income of producers of renewable energy between 2005 and 2013 is

presented in the figure below.

As can be noticed in the figure, the percentage of green certificates from the income of

producers of renewable energy increased from 47.14% in 2005, to 61.71% in 2014, with an

intensification of the aid granted to producers of renewable energy.

Figure 7.10. Evolution of the structure of the unitary income of producers of renewable

energy (Euro/MWh)

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

The impact of green certificates on the electricity price

The impact on the end consumer invoice in 2013 was 40.04 lei/MWh (8.92 euro/MWh),

given that the average price for electricity supply on the regulated market, established by

ANRE in 2013, was 155 lei/MWh.

The evolution of the impact of the application of the system for the promotion of energy

from renewable sources at end consumer level, for the 2005-2013 period, is presented in

the figure below.

103

Figure 7.11. The evolution of the impact of the application of the system for the promotion

of energy from renewable sources in the energy price. (lei/MWh)

Source: The ANRE report on the monitoring of the functioning of the system to promote electricity produced

from renewable sources in 2013

Also, considering the latest amendments of the legal framework62, on the exemption from

the application of provisions laid down by Law no. 220/2008 of a percentage from the

electricity amount supplied to end consumers (a provisions which mainly concerns big

energy producers), one can say that the impact on the remaining end consumers could

increase. The exemption63 would be differentiated, depending on the economic operators’

electric-intensity: 85% for electric-intensity higher than 20%, 60% for electric-intensity of 10-

20% and 40% for electric-intensity of 5-10%.

7.4. Conclusions

The goal of the aid scheme established by Law no. 220/2008 is to promote the production

of energy from renewable sources, in order to reach specific national targets of 33%, 35%

and 38% of energy produced from renewable sources from the final gross electricity

consumption in 2010, 2015 and 2020 respectively.

Subsequent to the application of this state aid scheme, in 2014, capacities installed in

electrical plants which benefitted from the system to promote renewable energy reached

4349 MW, and the associated renewable energy production is 6279 GWh. Thus, in 2013, the

percentage of electricity from renewable sources of the total gross electricity consumption

was 40%, the achievement degree of the national electricity target proposed for 2013 is

116%.

62

Amendments introduced throuh Law no. 23/2014. 63

According to GD no. 495 of June 11th

2014 for the establishment of a state aid scheme concerning the exemption of specific categories of end consumers from the application of Law 220/2008 on the establishment of the system to promote the production of energy from renewable sources.

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The income collected, reported by renewable energy producers from the sale of green

certificates, for 2014, amounted to approx. 1,663 million lei (376 million euro), which has

maintained the rising trend of the impact in the consumer’s invoice. Thus, in 2014, the

impact in the end-consumer invoice was 40.04 lei/MWh (8.92 euro/Mwh).

From a competition point of view, the market of green certificates was characterized in

2013 by a decreasing value of HHI, 908, with a moderate level of market power

concentration. However, one must consider the fact that the green certificates market is

complementary to the electricity production and trade market, the goal of issuing and

trading green certificates was to allow energy produced from renewable sources to have a

competitive price. The development of this market was a consequence of the direct

application of a state aid scheme reflected directly in the consumers’ invoice, as renewable

energy producers were incentivized both financially, through green certificates, as well as

through legal norms which ensure the takeover of the entire energy produced into the

National Electricity System, in a guaranteed manner and as a priority, in the detriment of

the other electricity producers, who produce from conventional sources.

Also, considering the latest amendments of the legal framework, on the exemption from the

application of provisions of Law no. 220/2008 of a percentage of the amount of electricity

supplied to end consumers (provision referring mainly to big energy consumers), one can

say that the impact on the rest of end consumers could enhance.

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8. STATE AID GRANTED TO SERVICES OF

GENERAL PUBLIC INTEREST – HEAT

PRODUCTION, TRANSPORTATION,

DISTRIBUTION AND SUPPLY BETWEEN

2007 AND 2013

8.1. The public heat supply service in Romania

The general heat supply service in Romania represents a service of general economic

interest (SGEI) which is provided in a centralized manner and falls in the category of public

utility community services, which must meet the following fundamental requirements:

continuity from a quality and quantity perspective;

adaptability to consumers’ requests;

equal and non-discriminatory access to the public service;

Decisional transparency and users’ protection.

The public heat supply service includes all the activities concerning the production,

transport, distribution and supply of heat public conducted by administrative-territory units

under the management, coordination and responsibility of the local public administration

or community development associations, in order to supply the heat required for the

heating and preparation of hot water for consumption for the population, public

institutions, social-cultural facilities and economic operators.

The regulators of the public heat supply service are the National Regulatory Authority for

Public Community Household Services (ANRSC) for the heat produced through power plants

or district plants and the National Regulatory Authority for Energy (ANRE) for the heat

produced in cogeneration.

The public heat supply service in the centralized system is provided through the dedicated

technical-edilitary infrastructure, which belong to the public or private domain of the local

public authority or the community development association, which forms the Centralized

heat supply system (SACET) of the town of the community development association.

SACET represents all the technical installations, equipment and facilities situated in a clearly-

marked area, connected through a common technological and operational process, used to

produce, transport and distribute heat, through heat networks, to a minimum of two users.

106

In comparison with the situation in European Union countries, public heat supply services in

the centralized system to towns in Romania are lagging behind significantly, from the

perspective of technical performance, quality, continuity, as well as costs and raw material

and energy consumption.

The current law defines the role and responsibilities of the Government, of the central

public administration authorities and local public administration authorities as concerns the

heat supply to towns and clarifies the competences and duties for every factor involved in

this supply, observing the principles of local autonomy, sustainable development and

environment protection.

At national level, the public policy on heat falls under the competence of the Ministry of

Internal Affairs (MAI) and is part of the state policy in the heat area.

At the level of the central public administration, there are several authorities with

responsibilities in the area of heat supply public services:

(i) The Ministry of Internal Affairs (MAI) is in charge of the analysis, decision,

coordination, monitoring, planning and assessment processes for the

implementation of standards and the requirements to accelerate the

development of public utilities services according to similar ones at European

level;

(ii) The Ministry of Economy (ME)

(iii) The Ministry of Environment and Climate Changes (MMSC) for aspects pertaining

to environment conservation and protection;

(iv) The Ministry of Labor, Family, Social Protection and the Elderly (MMFPSPV) for

aspects pertaining to the social aid policy;

(v) The Ministry of Regional Development and Public Administration (MDRAP);

(vi) The National Regulatory Authority for Community Public Utilities Services

(ANRSC) for aspects pertaining to the regulation of community public utilities

services and individual heat systems;

(vii) The National Regulatory Authority for Energy (ANRE) for the heat produced in

cogeneration with electricity.

At the level of the local public administration, responsibilities are shared between the local

councils (at commune, town and municipal level), county councils, town-halls and prefect’s

offices, according to provisions laid down by Law no. 215/2001 on the local public

administration.

The management models of centralized heat supply systems by local public administration

authorities are:

Direct management by the local authority;

107

Management delegated to an operator which is owned 100% by the local authority

(e.g.: RADET);

Management delegated to public-private or fully private operator;

Municipal holding (electricity, heat, gas, water);

Public-private partnership (refurbishment of heat production sources);

Privatization of the centralized system (e.g.: CET).

8.2. The economic-financial situation of heat producing

undertakings which were granted the heat production, transport,

supply and distribution activity

The Competition Council has conducted a study on this sector, based on the information

submitted by 75 undertakings which produce, transport, distribute and supply heat (34

counties), out of which 41 are small and medium-sized enterprises, 27 are large enterprises

and 7 are services organized within local public authorities, enterprises which, through

Decisions of Local Councils, were granted the provision of services of general economic

interest in the area of heat.

Out of the 75 undertakings who answered the questionnaires in 68 companies the share

capital is mostly held by the state and in only 7 companies the share capital is mostly held

by private entities.

The economic-financial crisis which started in 2008 influenced undertaking operating in the

area of heat production, as results from the analysis of the main economic-financial

indicators for the period in question.

Table 8.1. The economic-financial situation of undertakings analyzed in the study, 2007-

2013

2007 2008 2009 2010 2011 2012 Oct. 2013

Billion

lei Billion

lei Billion

lei Billion

lei Billion

lei Billion

lei Billion

lei

Total – Turnover from heat production, transport, distribution and supply (75 undertakings)

3.82 3.89 3.95 3.83 3.70 3.23 2.36

Total – Income from the analyzed activity (75 undertakings)

1.75 1.87 1.98 1.98 1.93 2.40 1.47

Profit/loss 0.131 -0.263 -0.063 0.034 -0.137 -0.335 -0.521

Heat supplied to consumers – trend in the analyzed period, 2007=100%

100 96.28 92.08 90.52 84.76 71.61 60.74

108

19,92 19,73 19,98 20,49 22,78

25,75 26,48

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013

The evolution of losses (percentage) between 2007 and 2013

Linear (The evolution of losses (percentage) between 2007 and 2013)

From the data presented in the table above, one could notice a significant decrease of all

economic-financial indicators related to the heat supply activity. The turnover of the

analyzed undertakings and revenues generated from the core business decreased year-to-

year, given the increasing phenomenon of customers’ disconnecting from the centralized

heat supply system, as well as losses on the heat production and distribution flow, the

absence of financing solutions in order to modernize and refurbish power plants and

distribution networks.

The profit of heat producing undertakings in 2007 diminished in the analyzed period so that,

in 2013, heat producing undertakings had aggregate losses of 521 million lei. An important

contributor to this situation was to a large extent the increased price of the gas used for

heat production.

Figure 8.1. Evolution of the percentage of losses between 2007 and 2013 (%)

Moreover, analyzing the information submitted by the undertakings questioned in the

study, referring the ratio between the heat produced in plants and the actual quantity

supplied to household consumers or companies, the outcome was that an average of 22% of

the produced quantity is wasted because of obsolete heat transport and distribution

equipment (Figure 8.1).

The evolution of staff working in heat production, between 2007 and October 2013 is

presented in Table 8.2.

Table 8.2. The evolution of staff working in heat production, 2007-2013

2007 2008 2009 2010 2011 2012 2013

Total – staff employed in the undertakings analyzed in the study – no. of people

21,784 20,746 20,273 19,033 17,152 15,648 14,294

Evolution of number of employees in the analyzed period (%) – 2007=100

100 95.2 93.1 87.3 78.7 71.3 65.8

109

From the data above it results that through, the decrease of the activity in the heat

producing undertakings, an important number of employees were laid-off, almost 7500

employees (35%) have been laid off or the undertakings they used to work for have become

insolvent or gone bankrupt.

8.3. Production costs of undertakings operating in the area of heat

production, transport, distribution and supply, between 2007

and 2013

Using the data received from the undertakings included in the Competition Council’s study,

the following situation resulted concerning the yearly cost elements of every heat producer,

as well as the percentage of the main expenses in these costs.

Table 8.3. Costs incurred by undertakings for the public service of heat production, 2007-

2013

2007 2008 2009 2010 2011 2012 2013

Total costs incurred with heat

production – billion lei 2.80 3.12 2.91 2.62 2.38 2.17 1.84

Costs incurred with raw material

purchase - % 58.44 58.79 56.88 54.76 54.83 53.02 52.74

Costs with employees - % 18.79 18.52 18.85 17.91 19.01 19.20 19.36

Costs incurred for the distribution

network maintenance - % 5.88 5.26 6.26 6.86 7.27 7.65 8.90

Other costs incurred by every

undertaking - % (depreciation,

electricity, taxes, levies etc.)

16.89 17.43 18.01 20.47 18.89 20.13 19.00

Between 2007 and 2013, costs with heat production, transport, distribution and supply have

decreased year-to-year, given the decrease in the number of employees in the analyzed

undertakings, the decrease of the heat quantity supplied to household consumers and

companies, as the number of disconnections from the centralized heat supply system

increased.

From the analysis of the data submitted by the heat producing undertaking it resulted that

the highest percentage was that of costs incurred with raw material purchase (55.63% -

average value for the entire analyzed period), followed by salary-related costs (18.80% -

average value), other costs incurred by every undertaking (materials, electricity, contracted

services, depreciation, taxes, levies, penalties, water, post-related expenses, representing

18.68% - average value) and last, but not least, payments related to the maintenance of the

heat distribution network, which accounted for only 6.86% of the total expenses.

110

From the information received from beneficiaries, it resulted that the heat distribution

network, managed by local public authorities is highly worn, as it was built between 1960

and 1990, and it is a must to increase investments in the heat supply activity in the future.

Moreover, from the analysis of information received a structure of costs broken-down on

the main technological phases can be presented, i.e. costs incurred by the undertaking with

the heat production, transport, distribution and supply , as presented in the chart below.

From the presented data it results that the most important investments were made in the

heat production and distribution areas, approximately 80% of the invested amounts went

into these activities, as part of the service of general economic interest.

Figure 8.2. Structure of costs incurred with investments, broken-down on technological

phases, into the heat production activity

8.4. Heat production price

The local prices for heat invoiced to the population are approved by the local public

administration authorities concerned. The local public administration authorities can

approve local prices for heat invoiced to the population which are lower than the

production, transport, distribution and supply costs for the heat supplied to the population.

Should the local public administration authorities approve local heat prices invoiced to the

population which are lower than the production, transport, distribution and supply costs for

the heat supplied to the population, they ensure from the local budgets the amounts

required to cover the difference between the production, transport, distribution and supply

price for the heat supplied to the population and the local price of heat invoiced to the

population.

39,5

12,63

40,1

3,24 4,5

Structure of costs incurred with investments, brokendown on technological phases, into the heat production activity - %

Investment in heat production

Investment in heat transport

Investment in heat distribution

Investment in heat supply

Other investment (fixed assets, machine, licenses etc.)

111

The price invoiced to the population is the price for the heat supplied and invoiced to the

population through centralized supply systems, approved through the decision of the local

public administration authority or the community development association.

Local reference prices for the heat supplied to the population through centralized systems,

in to heat households and prepare hot household water are established by the provisions in

Government Ordinance no. 36 of August 2nd 200664 on specific measures for the functioning

of centralized systems for heat supply to the population.

Subsequent to analyzing the data received from the undertakings which provide the service

of general economic interest – production of heat – the following values of annual average

price per gigacalory resulted; this value was approved by the public authority, as well as the

price at which heat is supplied to the population and undertaking operating at local level:

Table 8.4. Annual average values of the heat production price (lei/Gcal)

2007 2008 2009 2010 2011 2012 2013

Average local price

approved by the public

authority for heat (lei/Gcal)

147.34 166.58 186.84 195.81 194.70 197.59 179.44

Average price for the

supply of heat energy to

the population (lei/Gcal)

124.69 134.59 148.63 161.52 174.93 189.88 179.38

Average price for the

supply of heat energy to

companies (lei/Gcal)

188.20 213.02 240.06 264.87 254.75 261.28 239.72

Figure 8.3. Evolution of the average heat production price, 2007-2013 (Lei/Gcal)

From the analysis of the results received, it results that in 2013 the lowest price for heat was

paid by household consumers in Cernavodă, Arad, Vaslui, Tulcea and Bacău; they paid

amount between 86 and 154 lei per gigacalory.

64

Amended and completed through the provisions of GO no.13/2009 and EGO no.69/2011.

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012 2013

Approved average price Average price - population Average price - companies

112

In the same year, the heat with highest price was supplied to household consumers in

Constanța, Reșita, Brăila, Miercurea Ciuc and Târgu Mureș, who paid amounts ranging

between 311 and 387 lei per gigacalory.

In the case of heat supplied to economic agents, the situation is as follows:

The lowest prices for heat were paid by companies operating in Cernavodă, Motru,

Tulcea and Ploiești, who paid between 90 and 195 lei per gigacalory;

The highest prices were paid by companies operating in Zalău, Mangalia, Focșani,

Reșita, Sibiu, Brăila; these companies paid between 415 and 579 lei per gigacalory.

8.5. State aid/compensations received by heat-producing

companies

In order to provide the service of general economic interest in the best conditions, public

authorities supported undertakings operating in the area of heat production with state

aid/compensations, in compliance with the national and community regulations in force.

In the analyzed period, state aid/compensations were granted based on the following state

aid scheme:

Order no. 125/2007 on the approval of the State Aid Scheme for the compensation

of losses encountered subsequent to the provision of services of general economic

interest by companies which produce, transport, distribute and supply heat, included

in Government Ordinance no. 36/2006 on the establishment of local reference prices

for the heat supplied to population through centralized systems, for the 2007 –

October 2009 period.

Order no. 252/2009 for the approval of the State Aid Scheme granted to economic

operators who provide the service of general economic interest of production,

transport, distribution and supply of heat to the population in a centralized system,

in force since October 2009 until September 11th 2014, on which date Order

1121/1075/2014 came into force, on the approval of the State Aid Scheme granted

between 2014-2019 to economic operators who provide the service of general

economic interest of production, transport, distribution and supply of heat to the

population in a centralized system.

Moreover, in October 2011 the provisions of EGO no. 69/31.08.2011 came into force for the

amendment of DO no. 36/2006, to eliminate the subsidy for the compensation of non-

forecast increase of the price of fuels used to produce heat supplied to the population

through centralized systems, granted from the state (central) budget.

113

Starting from that moment, the compensation of costs for the provision of the public service

to produce, transport and distribute heat in a centralized system to the population was

ensured solely from local budgets by local public administration authorities.

Thus, between 2007 – October 2013, the undertakings benefited from the following aid

measures (Table 8.5) promoted thorough the above-mentioned state-aid schemes:

1. Measure 1 – The compensation of non-forecast increase of the price of fuels used to

produce heat supplied to the population through centralized systems (Order no.

125/2007 according to art. 7, letter a);

2. Measure 2 – The full covering of the difference between the price to produce,

transport, distribute and supply heat to the population and local invoicing prices of

the heat supplied to the population through centralized systems (Order no. 125/2007

according to art. 7, letter b);

3. Measure 3 – The allocation from the state budget, through the budget of the

Ministry of Administration and the Interior, to the local budgets of administrative-

territory units of amounts which should account for maximum 45% of the costs

determined for the own fuel used for the production of heat for population, according

to art. 4, para. (1) and (2) in GO no. 36/2006, and further amendments and

supplements (Order no. 252/2009 art. 12, para. (2), letter a);

4. Measure 4 – The allocation from local budgets of administrative-territory units of

amounts to fully cover the difference between the price to produce, transport,

distribute and supply heat to the population and local invoicing prices, according to

art. 4 para. (4) in GO no. 36/2006, and further amendments and supplements (Order

no. 252/2009 art. 12, para. (2), letter b);

5. Measure 5 - The allocation from local budgets of administrative-territory units of

amounts to cover losses incurred due to the provision of the public services of heat

production, transport, distribution and supply to the population, in a centralized

system, and not accepted in the price/tariff, according to art. 52 in GO no. 36/2006,

approved with amendments and supplements through Law no. 483/2006, and

further amendments and supplements (Order no. 252/2009 art. 12, para. (2), letter

c);

6. Measure 6 – The allocation of amounts from the Government’s reserve fund, through

local budgets, in order to pay a percentage of the payment duty of economic

operators to gas and coal suppliers, transport included, according to art. 1 and 2 in

EGO no. 110/2009 (Order no. 252/2009 art. 12, para. (2), letter d);

7. Measure 7 – The allocation of amounts from the state budget, through the budget of

the Ministry of Administration and the Interior, in order to pay outstanding amounts

to the Societatea Naţională a Lignitului “Oltenia" - S.A. Târgu Jiu coal supplier and

Societatea Naţională de Transport Feroviar de Marfă "C.F.R. Marfă" - S.A., according

to art. 21 in GO no. 18/2010 (Order no. 252/2009 art. 12, para. (2), letter e);

114

8. Measure 8 - The allocation of amounts from the state budget, through the budget of

the Ministry of Administration and the Interior, in order to pay outstanding amounts

to the Societatea Naţională de Transport Feroviar de Marfă «C.F.R. Marfă» - S.A.,

according to art. 17 in EGO no. 103/2010 (Order no. 252/2009 art. 12, para. (2),

letter f);

9. Measure 9 – Other state aid received by the economic agent for covering costs

associated to the provision of the public service of heat supply in a centralized

system.

Table 8.5. The volume of compensations granted to companies operating in the area of heat

production, transport, distribution and supply in a centralized system

Compensations

granted for the

supply of the service

of general economic

interest (heat

production)

2007-

mil. lei

2008 –

mil. lei

2009-

mil. lei

2010 –

mil. lei

2011 –

mil. lei

2012

– mil.

lei

Until

Oct.

2013

– mil.

lei

Total

Measure 1 264.14 285.82 244.09 127.70 82.08 3.04 0.0 1,006.87

Measure 2 336.78 273.60 267.09 119.95 130.32 141.27 116.03 1,385.04

Measure 3 131.03 119.85 127.87 191.25 209.67 2.94 0.0 782.61

Measure 4 217.78 207.44 249.98 398.66 421.75 454.32 332.41 2,282.34

Measure 5 0.0 0.04 36.14 2.30 21.90 47.52 23.66 131.56

Measure 6 0.0 0 117.00 7.80 8.98 0.60 0.0 134.38

Measure 7 0.0 0 0.0 152.74 41.16 0.0 0.0 193.9

Measure 8 0.0 0 0.0 91.34 0.0 0.0 0.0 91.34

Measure 9 173.60 5.23 12.57 23,53 20.73 5.04 0.59 241.29

Total 1,123.33 891.98 1,054.74 1,115.27 936.59 654.73 472.69 6,249.33

From the date presented in Table 8.5 it results that in the 2007 – October 2013 period, heat-

producing undertakings received state aid / compensations in the amount of 6.24 billion lei

from central and local public authorities; most amounts were granted for the complete

cover of the difference between price of heat production, transport, distribution and supply

to the population and local invoicing tariffs, in compliance with Order no. 252/2009 art. 12,

para. (2), letter b), i.e. 2.28 billion lei.

Furthermore, one can notice that the amount of state aid/compensations from which the

undertakings benefited in 2013 in comparison with 2007, decreased by approximately 58%,

from 1,123.33 mil. lei, to only 472.69 mil.lei.

The reason for this is the significant number of consumers – individuals and companies,

which disconnected from the centralized heat supply system in the analyzed period, the

decrease of the quantity of supplied heat, as well as the elimination as of 2011 of the

115

subsidy granted from the (central) state budget, currently the level of compensations is

established and granted from the budget of local public authorities; at the end of 2013 the

amount of compensations was much lower in comparison with the level reached between

2007 and 2010.

Figure 8.4. The rising trend of state aid granted as compensations for the undertakings

which produce, transport, distribute and supply heat, 2007 - 2013 – actual prices

Apart from the compensations granted by suppliers in order to meet the public services

obligations, heat-producing undertakings received state aid under the form of a bonus, for

the promotion of high efficiency cogeneration based on the actual demand of heat, a state

aid scheme which was implemented by the Ministry of Economy through G.D. no. 219/2007

on the promotion of cogeneration based on the actual heat demand, which takes the form

of financial aid granted to cogeneration plants, in order to maintain them on the electricity

and heat market, should these plants meet high efficiency requirements and save significant

amounts of fuel and emissions, but have high production costs.

Table 8.6. Value of state aid granted by the Ministry of Economy for the promotion of high-

efficiency cogeneration based on the heat demand

Aid measures granted as a

bonus for the promotion of

cogeneration to heat

producers

2007-

mil. lei

2008 –

mil. lei

2009-

mil. lei

2010 –

mil. lei

2011 –

mil. lei

2012 –

mil. lei

2013 –

mil. lei Total

0 34.41 32.74 46.59 153.78 202.53 201.67 671.74

In the cold season, apart from state aid/compensations granted for the provision of the

service of general economic interest, for heat production, local public authorities can

establish / promote social protection measures of the population by granting monthly social

aid for covering a part of the expenses related to heating the household during the winter

1,12

0,89

1,05 1,11

0,9

0,65

0,47

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

2007 2008 2009 2010 2011 2012 2013

Bil.lei

trend

116

season, to specific categories of vulnerable people, according to provisions in EGO 70/2011

on social protection measures during the cold season.

Thus, between 2007 and 2013, local public authorities granted social aid to vulnerable

consumers using heat supplied in the centralized system to heat households in the amount

of 760.28 mil. lei.

Figure 8.5. Value of social aid (granted to specific categories of vulnerable consumers by

local public authorities) in comparison with state aid/compensations in the 2007-2013

period – actual prices

The concept of sustainable development in the area of town heat supply presupposes

technical solutions which can ensure, on one hand, normal living and working conditions to

local communities and the satisfaction of social needs thereof, with return-on-investment

and energy efficiency, and, on the other hand, the conservation of primary resources,

environment protection and conservations, without affecting the biosphere balance and

the access of future generations to primary renewable energy sources.

Starting from 2006, the Government approved the ‘’2006-2015 urban heating, heat and

comfort’ program, whose goal is to make the centralized heat production and distribution

system more efficient, and to this purpose amounts were allocated for the refurbishment,

modernization and development of centralized heat production and distribution systems65

65

EGO no. 48 of June 15th

2004 for the adoption of measures concerning the supply of heat to population, for heating households and preparation of hot household water, through centralized heat supply systems; GD no. 172 of February 20

th 2007 on the allocation to administrative-territory units of the broken-down

amounts from the value-added tax for the refitting, refurbishment and development of centralized heat production and distribution systems;

112,78 106,02 89,24 83,54 71,6 147,29 149,79

1.123,33

891,98

1.054,74 1.115,27

936,59

654,73

472,69

0

200

400

600

800

1000

1200

1400

2007 2008 2009 2010 2011 2012 2013

mil. lei

Social aid State aid/compensations

Linear (Social aid) Linear (State aid/compensations)

117

in order to reach best parameters for the reduction of production costs, so as to phase out

subsidies for the heat supplied to the population, as well as the reimbursement of loans

contracted in this respect and the payment of interests, charges and other associated costs.

In the monitoring action, such state aid was identified, in the analyzed period state aid was

granted for the refitting, refurbishment and development of centralized heat production

and distribution systems in the amount of 377.40 mil. lei.

Throughout the period, there was a significant decrease of amounts granted for the

refitting, refurbishment and development of centralized heat production and distribution

systems, from 280.70 mil. lei granted in 2007, to 4.60 mil. lei in 2013. (Figure 8.6.)

Figure 8.6. The decreasing trend of aid, granted for the refitting, refurbishment and

development of centralized heat production and distribution systems, between 2007 and

2013 – actual prices

GD no. 409 of May 4

th 2007 on the allocation to administrative-territory units of the broken-down amounts

from the value-added tax for the refitting, refurbishment and development of centralized heat production and distribution systems; GD no. 896 of August 1

st 2007 to administrative-territory units of the broken-down amounts from the value-

added tax for the refitting, refurbishment and development of centralized heat production and distribution systems; GD no. 1356 of November 12

th 2007 to administrative-territory units of the broken-down amounts from the

value-added tax for the refitting, refurbishment and development of centralized heat production and distribution systems.

280,70

26,59 19,02

29,98

7,4 9,09 4,60

0,00

50,00

100,00

150,00

200,00

250,00

300,00

2007 2008 2009 2010 2011 2012 2013 M

il. le

i

trend

118

8.6. The contribution of undertakings operating in the area of heat

production, transport, distribution and supply, to the state

budget, social insurance budget, unemployment budget and

local public authorities budget, between 2007 and 2013

The amounts transferred to the general consolidated budget by the undertakings to which

the heat production activity was entrusted were approximately 2.9 billion lei in the

analyzed period, with an average of 400 million lei per year, with a significant contribution

to the development of local communities in which they operate.

Table 8.7. Annual contributions of heat producers, to the general consolidated budget and

local budgets

2007 2008 2009 2010 2011 2012 2013

Total,

2007 –

2013

%

Total taxes and

taxes paid (mil.

lei) out of which

to:

410.06 364.86 427.78 422.50 493.02 485.55 256.49 2,860.3 100%

State budget -

mil. lei 169.75 150.56 194.88 183.95 242,46 195.18 103.51 1,240.32 43.36%

Social insurance

budget - mil. Lei 190.53 184.31 194.02 191.83 216.67 246.44 125.56 1,349.39 47.18%

Unemployment

budget - mil. lei 11.01 7.24 5.90 5.54 5.59 11.92 3.72 50.95 1.78%

Local budget -

mil. lei 32.93 16.89 16.46 23.67 19.97 19.92 18.23 148.11 5.18%

Other taxes and

levies -mil. lei 5.81 5.85 16.51 17.48 8.29 12.07 5.46 71.50 2.50%

119

8.7. The main problems identified in the functioning of the

centralized heat supply system in Romania

Lack of coordination between sectoral strategies and policies

The heat sector is the responsibility of five central institutions which fail to best

coordinate their strategies and objectives in the heat sector, with the following

consequences which present a brief insight into the status of this sector:

Technical difficulties – major dissemblance between demand and offer, excess

production, technical losses, lack of investments in refurbishment.

Economic difficulties – growing tariffs and under the production cost, high subsidies,

financial losses for system operators, accrual of debts to fuel suppliers, lack of

financing sources, competition from alternative heating sources.

Social difficulties – increase of the heat invoice, reduction of the population’s

affordability degree, reduction of social aid.

Administrative/institutional difficulties – lack of experience of local authorities in the

management of heat supply, faulty management, faulty coordination of the two

regulatory authorities (ANRSC does not have competences to get involved in the

management of problems at local level, ANRE has focused on the electricity sector).

High degree of inefficiency, low affordability degree, high pollution, high short-

term under-financing degree.

The inefficiency of the centralized system stems from the existing production

processes, as well as losses from transport and distribution networks. Most

operators are inefficient from an economic perspective, losses of heat being

compensated with increasing budget efforts. Producers claim that some losses are

also due to the regulated pricing system, i.e. authorities admit, when prices are

established, a certain level of expenses lower than the actual production expenses

and authorities accept increasing prices later than the moment of the justified

increase of expenses (especially the increase of fuel price), and the gaps become

losses.

In order to avoid the population’s default risk, local administrations must make sure

that the price of the gigacalory is under the affordability degree accepted at national

level, so they subsidize heat. This subsidy is a burden on the general consolidated

budget, estimated at almost one billion euro yearly, an amount which actually

finances the inefficiency of system operators. Despite the relatively high volume of

subsidies, a significant number of operators on this market have a high indebtedness

degree.

120

The affordability analysis shows that the percentage of expenses with heat in the

average income of a household could exceed the accepted 10% threshold and could

reach 12% at national level and even 14-15% in some regions of the country. The

annual heat cost of a household connected to a centralized system could be 20-40%

lower than the individually-produced heat from gas, this percentage varies

depending on the efficiency and technology adopted by the operators of centralized

systems.

The urban heating system in Romania is also characterized through a high degree of

pollution, which generates indirect additional costs. Even though, the carbon print of

heat producers can be solely reduced through the use of alternative fuels (e.g.

household waste), or through the use of more efficient technologies (e.g.

cogeneration), these methods are used at a very low scale in Romania.

On the other hand, most operators are mainly owned by local administrations which

may encounter difficulties in the financing process of such investments, particularly

if they already have a high degree of indebtedness.

Significant barriers preventing the higher scale entrance and the refurbishment of

technologies to produce heat in cogeneration.

These barriers are mainly related to the poor strategic planning for the heating and

cooling infrastructure, conditions on the local heat markets which fail to ensure a

price of heat which should reflect production costs and lack of a long-term vision of

energy-associated policies.

The decreasing trend of heat produced in plants and district stations, as a

consequence of customers’ disconnections from the centralized heat supply system

(decrease of the number of consumers given by the switching to an individual

heating source).

There are high losses from the heat and hot water transport and distribution

network, and to eliminate such losses and improve the quality of the service

investments are required in the refurbishment of secondary heat networks

associated to area plants.

A major component of the heat production price is fuel (gas) and in the current

context of liberalization of gas prices, producers need to switch to other fuels (coal,

biomass etc.) in order to maintain or even reduce the production price.

The acute absence of finance sources for works of refurbishment of primary and

secondary heat networks operated by economic agents (the primary and secondary

distribution networks are old, there are numerous faults which lead to heat and

water losses and, as a consequence, the interruption of supply until faults are fixed);

The refurbishment of transport and distribution equipment is essential and

compulsory for the reduction of losses on the transport and distribution networks.

121

the law on the owners’/residents’ associations is not adapted to actual conditions;

these associations are legal entities, but do not own assets and thus outstanding

debts cannot be recovered, the conditions of association management are not

correlated with the legal provisions and they cannot be audited by financial control

bodies.

Legal actions against debtors are cumbersome, with numerous judgment terms and

different reasoning in similar cases, with high expenses, and execution is very

difficult, and amount cannot be fully recovered.

Lack of understanding of owners’ associations of the responsibility they have in

managing a common asset, through the faulty management of the installation

associated to the common parts of heat supply, which has led in time to an increase

of mistrust on the services provided by heat producers.

8.8. Measures which could improve the functioning of the urban

heating system in Romania

better informing of the population on the fact that technical-economic analyses,

including those conducted at the level of the European Union, point out the fact that

the most economical and efficient heat supply solution is the centralized supply

solution, promoting a policy to attract consumers for extending the heat market by

charging attractive rates and the implementation of a flexible and efficient system to

collect the amounts due for the sold heat.

Establishing, through legal measures, perspectives and directions for the

development of the centralized urban heating system, according to Romania’s

Energy Strategy and the European Union standards.

Making investments to refurbish the heating system by attracting non-reimbursable

funds.

Extended use of unconventional resources (geothermal water, biomass) to produce

heat.

Thermal rehabilitation of blocks by restoring the thermal insulation, refurbishing the

indoors installation and direct individual metering of consumers.

Implementation of the operation control and tracking system and the dispatching of

operational information, data and parameters of heat plants, together with the data

of heat meters installed at users.

Refurbishment of the heat distribution system and the hydraulic and thermal

balance of outdoor and indoor distribution equipment.

122

Mounting high efficiency cogeneration turbines to cover the demand in the summer

season and peak consumption during the cold season, refurbishment of heat

pipelines with pre-insulated pipes.

In order to improve the quality of the heat supply public service – the establishment

of a direct relation with end consumers, by generalizing the individual invoice, as

well as placing the customer in the middle of all concerns and measures, with a focus

on securing the no default customers’ loyalty.

A more efficient heating principle would be the production of heat as close as

possible to the consumption place, such as block plants or district substations.

Transition to private or public-private management of centralized heat supply

systems.

The delegation of the management of the public heat supply services through the

mechanisms offered by the by the applicable legislation.

Reduction of local monopolies and ensuring a competitive environment for heat

production and distribution.

Through the application of these measures, the centralized heating system may become

competitive with individual heating systems and could lead to consumers’ reconnection to

the network and thus, to the increase of the service quality and the return-on-investment of

the heat production system.

123