There is no reason why Romania should be lagging behind other countries while there is so much money at our disposal

25 Mai 2011

JEAN-PIERRE VIGROUX

JEAN-PIERRE VIGROUX'S OPINION ON..

… the crisis as an opportunity to improve: It can be an opportunity to have a better productivity and to improve, but we have to be social too. What is the purpose of having a fantastic performance in a company if people are unable to buy its products, because they have no jobs and no money? Sometimes we tend to miss the fact that, in the end, we are all working for the harmony of the society.

… further changes in the fiscal area: A little bit of consistency in taxation will hurt nobody. One can say that it’s better to correct a mistake even if this means changing, but I believe that good thoughts before and consistency later would be the best approach.

…developing the capital market: A very good solution would be to provide more important incentives for savings through private pension companies. It’s like hitting two birds with one stone: at the same time you enhance the capital market, because the money has to go somewhere, and this is also somehow forcing to some compliance, which is not bad at all.

 

 

Q: You have a long experience in Romania and a thoughtful understanding of the business climate here. From this perspective, how do you assess the present economic situation?

Jean-Pierre Vigroux: I am now more optimistic than last year, because the figures released by various institutes and analysts are far more encouraging and, at the same time, the situation in the countries currently recording highest growth rates (like Germany, China and so on) is also encouraging. Actually, the major issue in Romania has been the crisis in the real estate industry, owing to the huge “bubble” that existed there in the past. I remember that, when I came here in July 2008, I declared that it should be no reason to witness a crisis in Romania and, partially, I still don’t understand why we have been facing such a deep recession here. Excepting the real estate – where the prices of the land reached crazy levels and created artificial wealth – the fundamentals have not been so terrible. Moreover, throughout this period, exports have been reasonably good, and now they have boosted.

As a matter of fact, although all industries have been affected by the crisis, some of them have still been successful. Real estate has been, indeed, a disaster, also impacting on the banking industry which has been hit by the non-performing loans problem and the lack of appetite for loans. Retails have also encountered difficulties, as consumers have displayed a more reserved attitude, many of them deciding to postpone purchases. Yet, if we look at the automotive industry, although the market for new cars has witnessed a decline, it has managed to get better revenues in the maintenance area. This kind of change existed in most industries, which has helped them survive the crisis. It seems that what was worst is now over and, although we are still far away from getting rid of problems, at least our feeling is a little better as we no longer worry about collapsing and becoming insolvent.

Q: Do you think this crisis has also been an opportunity for the business environment to improve?

Jean-Pierre Vigroux: In fact, though it may seem very basic, we should always wonder whether the economy works for people or whether people have been created just to make the economy work. If the economy is made for people, then a crisis is a severe threat of reduced purchasing power, of thousands of jobless and of increased poverty among the most vulnerable classes of the population like elder people living out of small pensions. If people are made for the economy, then a crisis is an opportunity to improve efficiency of tasks, to review business models and boost creativity.

Most of the managers will tell you that the keys to survive during a period of crisis are cost control and increased productivity. I cannot say that it is a wrong statement. But we should never forget solidarity. It is true that in wealthy times we tend to be more attentive to people, to be more generous with their salaries and to hire people whose jobs do not necessarily bring a lot of added value. But what is the purpose of achieving 100% efficiency at a micro-economic level when at a macro-economic level huge amounts of money are required to compensate for the jobless or increased poverty makes goods unaffordable?

Let’s compare France and Japan on one important feature. Japan is a country of fantastic technology and state-of-the art industries and still, in their buildings, there is always somebody driving the lifts and opening the doors for you. This is something that disappeared in France - 50 years ago. In Japan, if you go to a supermarket, there is somebody putting your stuff in a bag, while in France this will never happen. One might have the impression that, not having those employees, the products will be cheaper, because they don’t comprise the labor cost, but, on the other hand, we shouldn’t forget that the unemployment has also a cost. This is a lesson of solidarity given to the world by a country, Japan, which has always had to think about solidarity due to its exposure to natural disasters. So, gains of productivity should not be made at the expense of good corporate citizenship.

In any case, the current crisis will remain in the History as a fantastic chance given to mankind if it helps eventually get rid of bad practices like sub-primes and some other funny financial products! I am not sure whether, in spite of the strong declarations made by the world’s leaders in the autumn of 2008, this chance will be seized, and this would be unfortunate.

Q: Which are the main problems of the Romanian economy now?

Jean-Pierre Vigroux: There is a terrible deficit of trust, on both a national and an international level. Over time, there has been a long list of promises that have not been kept as well as a manner of doing things that is not up to people’s expectations.

One of the most important problems in Romania is the perception of corruption and, unfortunately, this is not a completely fake perception, because there is corruption in Romania. I don’t believe that it is bigger than in other countries, but it is clearly more visible because of the system of tips everywhere. If you need to see a doctor, for example, nobody looks at you if you don’t pay something. If we think how poorly the doctors are paid, it is not so difficult to understand it but, for any person making social security contributions, it is very annoying. Theoretically, the social security system is covering all hospital costs but, in practice, such costs represent only one third of the total amount you pay, because you have to give something to nurses, to doctors, etc. and this will make two thirds of the total costs.

This may look anecdotal, but this makes citizens wonder why they should pay social security contributions or taxes and this becomes a powerful incentive for developing the black economy. Some economists describe a development model based on limited tax compliance as the “Italian model” concluding with some cynicism that, though it is not to be recommended, it may have some merits in some circumstances if it brings development. I do not agree. I believe that excess of black economy is tarnishing the image of the business climate and this is eventually hampering development through unfair competition and insufficient resources for the State. These problems are not helping present Romania as a good place to do business.

Another issue that I think to be very important is the weakness of the capital market. If you compare the local market with the Polish one, for example, the latter is active and really helps attracting foreign money to the country, while in Romania liquidity is still very low. This doesn’t attract foreign money, doesn’t attract M&A deals and cuts the country from some significant flows of money.

Q: Why do you think this happens? And how can the capital market be developed?

Jean-Pierre Vigroux: How this problem can be solved looks a little bit like the story about the egg and the hen. In terms of legislation things are almost right: Romania has adopted the legislation of a proper stock market. Still, the information is not very transparent and this is not creating the necessary trust and, because of that, many  Romanians who have money intend to invest abroad. Last, but not least, until recently real estate was attracting all the money, so the interest in the capital market was low. In addition, people do not have the culture of investing in shares. While the Anglo-Saxons tend to see the capital markets as a primary place to invest, through direct or indirect investment, the French and the Romanians are still different in this respect, as they tend to be suspicious comparing dematerialized shares with actual stones!

A very good solution that could easily be adopted is to provide bigger incentives for savings through private pension companies. Today, the share which is tax deductible for private pensions is very small; let’s say the State allows for 10% of the revenue to be tax deductible as contribution to the pension schemes. In such situation any employee would be interested if his company is paying, because he cares about his own contribution. So, the employer would declare the revenue, and the employee would have to pay the 16% tax on salary. So, the State would get more money and the employee would not rely only on the State pensions when retired. It’s like hitting two birds with one stone: at the same time you enhance the capital market, because the money has to go somewhere, and this is also somehow forcing to some compliance, which is not bad at all.

Q: How do you assess the anti-crisis policy of the Government?

Jean-Pierre Vigroux: What anti-crisis policy? There were some specific measures that came as a result of negotiation with the financing institutions, designed to improve the macroeconomics of the country. There were also some specific measures to help some industries (like the “Prima Casa” [First Home] and “Rabla” [Junk] programs) and a measure to avoid taxation of reinvested profit last year - but it was so complex that I am not aware of too many companies enjoying it. These are good measures, but they are very limited.

Let’s just remark that this country is still lacking good infrastructure and does not consume the European money, which is very frustrating, because money is available, the need is here but we seem to be incapable to match it. This must be fixed, because there is no reason why Romania should lag behind other countries while there is so much money at our disposal.

Q: What measures would you take as part of the business plan if Romania were a company?

Jean-Pierre Vigroux: For me, the hottest issue here is tax compliance, so my first measure would be to make everybody pay taxes, filling the Treasury of the nation with money and helping the nation make its way out of the crisis. What you see here is sometimes scandalous. I welcome some measures that have recently been taken, and some signs of good will to really implement these measures – because the implementation has always been the key problem here. All the international observers were saying “Romania has done a good job in adopting the legislation,” but in fact the main issue has been its implementation.

Many of my Romanian colleagues tend to be very cautious, preferring to wait and see if something really happens in respect of more effective fight against tax evasion, as they heard so many times in the past the same story, but I am happy to see some actions after 20 years when there was nothing. I hope that this will eventually lead to avoiding any other tax increases, because increasing taxes will create even more tax evasion.

Q: What do you think about the current fiscal environment?

Jean-Pierre Vigroux: I believe that the current taxation for the companies is competitive overall, although there are some countries (like Bulgaria) that are doing better. It is true that the high rate of VAT is hitting the population. But here, in Romania, there is also tax evasion from a VAT perspective, although this is normally the tax instrument which secures the smallest level of fraud because it is the easiest to control. The 24% rate is huge, indeed, but Romania has also the need to balance the State budget. For me, the action which MUST be taken is the capping of social contributions. I welcome what has been done for pension contributions, but some complex rules of application are reducing the effect of the measure. The service provided by the social security and pension system is awfully bad. Its cost should be reduced down to an acceptable level in order to improve tax compliance.

Q: Do you anticipate further changes in the fiscal area in the near future?

Jean-Pierre Vigroux: I hope not, except, obviously, for what I should like to see implemented such as the capping of social contributions! I think that a little bit of consistency in taxation will hurt nobody. When you read the expectations of the business community, the story is every time about stability and consistency in the fiscal strategy. One can say that it’s better to correct a mistake even if this means changing, but I believe that good thoughts before and consistency later would be the best approach.

Q: What can you tell us about Mazars: what are its main business lines?

Jean-Pierre Vigroux: The biggest business line is the audit, accounting for slightly below 50% of our revenue. Then, there are the tax advisory and outsourcing business lines, with slightly more than 20% of the total, each, and the legal services, with 10%. I think it’s a proper structure of business, similar to what I have seen in other companies where I previously worked, and it is very safe.

Q: What about the strategic objectives for the short and medium term?

Jean-Pierre Vigroux: My objective is to make of Mazars the first alternative to Big4. When I came here, three years ago, I have been teased by some people about being the number six versus being the number five in the market, but I find that of little importance. My ambition is that our firm be recognized in the market as a quality firm, and the good work we are providing make us a valid alternative to the market leaders. I don’t have the ambition to be a number in the market, but to be recognized in my niche, to have happy people working for me, to provide quality services to my clients. In France, Mazars is really a big company in terms of market share, but in all other countries the strategy is not focused on immediate market share but on the quality of services.

At the beginning, the plan was to develop our business along with the emergence of the local companies accessing the capital markets, or of the companies wanting to be compliant or where the management would have been overwhelmed in a certain stage of development and needed an auditor, etc. But it is still a little bit early for this in Romania and, as a matter of fact, it’s early for this everywhere in the region. I thought that Czech Republic and Poland were more advanced in this respect, but it was not true. Everywhere it was the same scenario, because all the local companies existing in 1989 were sold to international players. That is normal, I believe, because foreigners had money, and the capital markets were not working at that time at all.

But things are going to change. First, there are local entrepreneurs developing companies, and at a certain stage they will grow and feel they lose control and need somebody to help them. Second, there are those companies that don’t want to have problems with the State and want to be compliant, and they will need an auditor to fix that. Third, there will be those needing capital in order to develop their business, so they will need the kind of services we are providing in order to go to the financial markets or to the bankers. We are not very advanced in any of these scenarios, but their time will come, I have no doubt.

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Jean-Pierre Vigroux is an auditor and certified accountant, of French nationality, member of: Chamber of Financial Auditors of Romania (CAFR), Romanian Chartered and Certified Accountants Body (CECCAR); French Adviser for the Foreign Trade (CCEF), since 2001. Former President of the Foreign Investors Council (2003-2004) and associate member of the Business Advisory Council of the Stability Pact for South-Eastern Europe (2004-2007).

He boasts an over 32-year experience in transaction-related services and financial auditing, as founder (1991) and General Director of PricewaterhouseCoopers Romania (followed by the supervision of PwC activities in Serbia, Macedonia, Bosnia and Albania, 2004-2007). Adviser for the preparation of more than 70 joint ventures and privatisation projects in Romania, amongst the most important in terms of capital invested Managing Partner at Mazars, starting 2010 Jean-Pierre also coordinates thebusinesses of the Mazars Group in Central and South-Eastern Europe.