4 important facts about Romanian food business

Romania is an emerging food processing location in Eastern Europe, and despite some challanges, more analysts predict: this country will be the bread basket of Europe.

When it's about European expansion in food business, it's good to know about opportunities provided by Romania:

#1 Romania is the only country in Eastern Europe which regards food industrial direct investments as a strategic business

The investment promotion of Eastern European governments typically focus on fancy industries like automotive, biotech, IT etc. Romania has a unique approach: they love agricultural and food processing investors, and government grants support food-related investments. (The high motivation of Romanian politics in food business are also represented by the fact: the EU-comissioner - "federal minister" - Dacian Ciolos is also from Romania).

#2 The Romanian food business -related population is one of the largest in Europe.

The agricultural population of Romania reaches 3 million people, far the largest number in Eastern Europe. This means low-efficiency, and the same time inexhaustible labour supply for any food business, including the highest level processing (the government is keen about re-training subsidies).

#3 Romania has the 2nd largest crop land in Central- and Eastern Europe

Romania is viewed as Poland in 5-7 years ago: the large farmland investments doubled-trippled the land prices in Poland. Currently, Romania has large and deeply underpriced croplands. The increasing agricultural production can be the base of any food processing business in the country.

#4 Challenges
The main structural challenges before Romania on the road to the top are the following:

• Small average farm size, a need for concentration in the industry. It's a returning task for Romanian goverments to improve farm structures and promote mergers in agriculture business. Foreign direct investors can aquire farms without limits, and domestic agri-companies also invest in land.
• Weak financial support, e.g: low-level bank loans. Getting a bank loan in Romania is not easy in food business, however relevant EU funds support the industry.
• Weak infrastructure: the transportation infrastructure and public utility services are under the average Eastern European level, but the above mentioned EU funds also finance large-scale motorway developments and infrastructural projects.

Background: ongoing agriculture reforms in Romania

Government grants to boost food processing investments in Eastern Europe

Agriculture is one of the most subsidized sector of the European Union, and Eastern European governments are keen to subsidize food processing investors.

Generally we can say, Eastern European governments' threshold stimulus is around 50 million euros investment and approx. 250 new jobs in food processing industry, under these numbers you are a very small investor. Governments normally sign an agreement with investor, so receiving a government grant is a contractual connection between the company and the government. It means, you get some money, but you also have some obligations, e.g: for job creation money you have to employ your staff for 1-2 years - and when you could't, you have to pay back the grant.

The subsidizing process always starts at the governmental investment promotion agencies: the PAIZ in Poland, the HITA in Hungary, and the RomTradeInvest in Romania. Decision making about the government subsidy requires normally 1-3 months.

There are several dues you can apply for, here we overview the most important:

#1 Subsidies for investments in "assets"

Governments appreciate the investments is real estate (new processing plant) and machinery. Machinery investments can be the main part of investment costs, e.g: Polish government subsidizes it with a 2-10% grant.

When you think about real estate grants, do not forget: real estate business is a particular profession, and real estate costs are approx. 10% only of the total investment - it's much easier to lease a property on a subsidized fee.

Case study: subsidized leasing in Polgar, Hungary Polgar Industrial Park, Hungary won an EU grant in 2012 for development of a new, 7,000sq.meter (75,000 sq.feet) manufacturing hall, available from Q4 2012. The grant provides a leasing fee discount for potential investors, and in the meantime they don't have to invest in a real estate.

#2 Job creation and other HR-related subsidies

The G-spot of Eastern European governments is job creation, this is the magic word you should build on. Some countries simply provides a "head money" for each new job created, others provide grant frameworks. For example, if you invest 40 million Euros in Romania, AND create at least 300 new food processing jobs, the Romanian government will offer a maximum 20 million Euros package. The final job creation grant in Romania depends on the location of the new plant (investments in underdeveloped regions get higher grants), contribution to infrastructure development, involving research and development, energetic efficiency improvement etc. Other governments subsidize also smaller costs (e.g:  training costs and employees' commuting cost in Hungary), but these are the typical schemes.

#3 Tax relieves

Eastern European governments are a bit shy when its about tax relieves. Before EU accession, most government provided large scale corporate income tax relieves, but the European Union doesn't like it indeed. However, most of the governments found smart, EU-compatible solutions for tax relieves. For example, the Hungarian government provides "development tax allowance", with the following scheme:

• Amount of subsidy: exemption for 80% of the corporate tax payable for 10 years following installation. Up to HUF 500 M turnover the corporate tax rate is 10%, above HUF 500 M the tax rate is 19%.
• Conditions: investment volume min. HUF 3 B (EUR 11.3 M), min. 150 new jobs OR HUF 1 B (EUR 3.7 M) investment volume and 75 new jobs in preferred regions
• Application: depending on investment volume request or application needs to be submitted
• Provider of incentive: Ministry for National Economy

#4 Cash grants

In the love packages of Eastern European governments there is two types of cash. All the grants above have specific goals, preferences, and obligations (e.g: re-training grants have to spend for local trainings), but when you hear about "cash grants" it means in general: you get money (normally not more than 5% of total investment costs) as a bonus.

The European sandbox

Finally: the government grants ("state aid" in European jargon) are generally prohibited by European Commission (the "federal government of EU"), because government grants have a negative impact on internal market competition. However, there are some exceptions, when EU not prohibits but supports state aids: the underdeveloped regions of Eastern Europe can provide grants on this way. The understanding of EU state aid policy can help to make better investment decisions, so lets take a look at the following presentation:

State Aid Rules - EU Commission from ICIP Serbia - EU funded project

Timisoara, a leading food location in Romania

The capital city of West-Romania Region has 300,000+ inhabitants, excellent natural conditions and supplier basis, good access to Western and Eastern European markets. The food processing industry is the organic part of boosting local economy.





Nagyobb térképre váltás

Timisoara was established in the 13th century in the Hungarian Kingdom. This is the historical capital of Banat Region, part of the Pannonia plain. It was the first mainland European city to be lit by electric street lamps in 1884. It was also the second European city with horse drawn trams in 1867. The Romanian christmas revolution in 1989 started here.

 source: Wikipedia



The Banat Region is a traditional agricultural area. The black soil and low water table, the continental climat (average high temp: 17 °C, average low temp: 5 °C) make this a fertile agricultural location.


The Romanian motorway and road system is not too developed, but Timisoara is very closed to the Hungarian border and to the M5 motorway. The Airport Timisoara provides access to the main European hubs from Munnich to Rome, and also has domestic flights, mainly to the capital city Bucharest.


Regarding local business environment, the city has 3 business parks. The County-owned Timisoara Industrial and Tech Park (PITT) has 11 hectares total area, and full public utility infrastructure. The 48-hectare-size Freidorf Industrial Park is managed by the City, and provides a low-cost land leasing with 49-73.5 years duration. The Log Center Timisoara has 18,000 storage and 3,700 office supply, rental fees: 4.5 €/sqm/month for storage and 7€/sqm/month for offices.


The top international FMCG investors in Timisoara are Nestlé, Kraft Foods, P&G, Danone. Smiethfield Foods has two subsidiaries in Timișoara and Timiș County: Smithfield Ferme and Smithfield Prod.

Overview of food processing locations in Eastern Europe

 

Poland, Hungary and Romania got the major food industrial investments in Central- and Eastern Europe. The strong agricultural background, the supportive public authorities and the easy access to the EU food market ensures the success of these countries.

Poland

source: wikimedia

Poland has one of the largest and strongest agriculture and food sector in Eastern Europe. The land market is highly liberalized and foreign investors are welcomed also in agriculture. This resulted an effective, market-driven development of local food business.

The leading agricultural region is Wielkopolska (Poznan) Region, west from Warsaw http://www.wielkopolska-region.pl/index.php. Although the natural conditions are under the national average, the levels of efficiency, technical equipment and farming practices make this region one of the leading locations. International food processing companies like Nestlé, Wrigley, Reemtsma invested here, appreciating the excellent agricultural background, the good transportation access to Western Europe and the large domestic market.

Hungary

source: North Great Plain Development Agency

Beside Poland, Hungary is the main target area of international food processing investments. Fifty percent of the investments in the sector came from EU investors, and 80% of the export goes to other EU countries. The good natural conditions, the effective farms, the trained labour force made it attractive for international companies like Friesland, Danone or Ferrero.

The North Great Plain (“Észak-alföld”) Region is traditionally one of the strongest agricultural areas. Industrial parks like Karcag Industrial Park www.karcagiiparipark.hu provide a large supplier basis, skilled (and unemployed) labour force and excellent transportation.

Romania

source: European Commission

Behind the two leading countries (Poland and Hungary), Romania became in recent years the most frequented location for CEE food investors. The agricultural population (3 million employees) is one of the biggest in Eastern Europe, and the 200 thousand employees in food processing industry are also meaningful. Meat, cereals and beverages are the most important product categories.

West-Romania http://www.regiuneavest.ro/en/home/ bordered by Hungary and Serbia, has a strong food business sector. Business parks like Freidorf Industrial Park in Timisoara http://www.regiuneavest.ro/en/investor-locations/public-industrial-zones/page/id/1/ are the main hosts of food processing industry, providing full range infrastructure and services.