stagnation or progress of sme in bulgaria from the point of view of the foreign investment

June 2005 Penkov, Markov & Partners Attorneys at Law

Stagnation or progress of SME in Bulgaria from the point of view of

the Foreign Investment

Vladimir Penkov

Executive Managing Partner of Penkov, Markov and Partnersand

Vice-President of the Bulgarian Chamber of Commerce and Industry


1. ECONOMIC ENVIRONMENTМACROECONOMIC ENVIRONMENT

STABLE RISE OF GDP IN EXCESS OF 5% ANNUALLYDEVELOPMENT OF LABOUR MARKET AND REVENUE

RISING NUMBER OF EMPLOYED UNDER LABOUR AND OFFICIAL CONTRACT

CONSIDERABLE IMPROVEMENT OF UNEMPLOYMENT RATE

STILL LOW INCOME LEVEL

STABLE INFLATION RATE

No. 1

* Source – see last page


GROSS DOMESTIC PRODUCT

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

2000 2001 2002 2003 2004 2005

Growth Trend

No. 2


GDP inBGN mln

42

5,5%


Economically active population (mln persons)

3.33

3.34

3.35

3.36

3.37

3.38

3.39

3.4

3.41

2001 2002 2003 2004 2005

Active population

Trend

No. 3



Average annual inflation

0%

100%

200%

300%

400%

500%

600%

700%

1997 2000 2001 2002 2003 2004

0%

1%

2%

3%

4%

5%

6%

2001 2002 2003 2004 2005

Inflation

Trend

No. 4


5 %


Balance of payment (as compared to GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

No. 5-1


7,5


Trade in mln US dollars

0

100

200

300

400

500

600

'88 '89 '97 '98 '99 '00 '02 '03 '04

Import

Export

Line 2

Poly. (Line2)

No. 5-2



2. DEVELOPMENT STRATEGY

NATIONAL POLICY FOR DEVELOPMENT OF SME

SME AGENCYSME ACTSTATUTORY PROVIDED PREFERENCES FOR SMENATIONAL STRATEGY FOR DEVELOPMENT OF

SME IN THE 2002-2006 PERIODACCESSION OF BULGARIA TO THE EUROPEAN

CHARTER FOR SMEEASIER CREDIT EXTENSION


No. 6


SME DEVELOPMENT STRATEGY

SIMPLIFICATION OF ADMINISTRATIVE ENVIRONMENT–ONE-STOP SHOP SERVICE

–TACIT AGREEMENT

IMPROVEMENT OF FINANCIAL ENVIRONMENT

ENCOURAGEMENT OF INNOVATION AND TECHNICAL PROGRESS

EUROPEANIZATION AND INTERNATIONALISATION OF SME – (SUBCONTRACTOR NETWORK)

IMPROVED ACCESS TO INFORMATION SERVICES

ENCOURAGEMENT OF ENTREPRENEURIAL SPIRIT

TAX PROVISIONS

No. 7



SME INFORMATION SUPPLY

EASIER ACCESS TO INTERNET - LOW PRICES AND ALTERNATIVE OPPORTUNITIES FOR NETWORK CONNECTION

E-GOVERNMENT

INFORMATION AND CONSULTATIONS FROM ORGANIZATIONS INDEPENDENT OF THE GOVERNMENT

SPECIAL INTERNET PORTALS IN SUPPORT OF BUISNESS - OPPORTUNITIES FOR FREE INFORMATION AND ADVERTISEMENT

INTRODUCTION OF ELECTRONIC DOCUMENT AND ELECTRONIC SIGNATURE


No. 8


IMPORTANCE OF SME FOR THE BULGARIAN ECONOMY

INCREASING SHARE IN GDP

SHARE IN THE GENERATION OF ADDED VALUE

GENERATOR OF EMPLOYMENT OPPORTUNITY

INCREASED LABOUR PRODUCTIVITY

RELATIVELY SMALLER SHARE IN FOREIGN DIRECT INVESTMENT


No. 9


RELATIVE SHARE OF DIFFERENT SME TYPE BY NUMBER OF EMPLOYED


NUMER OF EMPLOYED 2000 2001 2002 2003 2004

Up to 10 92,3% 91,9% 91,1% 90% 88%

From 11 to 100 6,7% 6,1% 6,9% 9% 11%

More than 100 1% 1% 1% 1% 1%

No. 10-1


ELECTRONIC READINESS OF BULGARIA

Computer coverage

0%10%20%30%40%50%

'02 '03 '04 '06 '08

BG

EU

Internet spread

0,00%

20,00%

40,00%

60,00%

80,00%

'02 '03 '04 '06 '08

BG

EU

Schools with Internet

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

'04 '06 '08

BG

EU

Computer skills

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

'04 '06 '08

BG

EU

No. 10-2



Employment situation (in mln persons)

0

0,5

1

1,5

2

2,5

2000 2001 2002 2003 2004

Total number ofemployed

Public sector

Private sector

SME

No. 11

* Source - see last page


Foreign debts in EUR

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005

Public Sector

Private Sector

Total Foreign Debt

Trend (total foreigndebt)

No. 12


12,5

6,5

6


Currency reserves at the National Bank in EUR and BGN

0

2

4

6

8

10

12

14

1998 1999 2000 2001 2002 2003 2004 2005

mln EUR

mln BGN

No. 13


12

6


CREDIT RATING - ACHIEVEMENT OF INVESTMENT RATING - LEVELS


Standard & Poor’s credit rating BBB-

Japan Credit Rating Agency BBB

Moody’s on Bulgarian currency debts and debts on securities in national currency

Ba1(positive outlook)

FICH IBCA International Rating Agency BB

No. 14


BANK FINANCING OF SME

GROWING INTEREST OF BANKS IN CREDITING SME

EXHAUSTION OF LARGE CREDIT OPPORTUNITIES

GROWING INTEREST IN THE VERY SME

IMPROVED QUALITY OF INVESTMENT PROJECTS

EXPANSION OF MANAGEMENT SKILLS

ABOUT HALF AND MORE OF THE SHORT-TERM AND LONG-TERM CREDITS IN 2004 WERE EXTENDED TO SME

BANK FINANCING – STILL INSUFFICIENT COVEREAGE OF SME NEEDS OF FUNDS


No. 15


Bank Credits for SME

• In the 2001-2004 period larger Bulgarian banks extended more than 46,000 credits to SMEs to the total value of more than BGN 2.0 billion (this figure does not include the credits of some large banks such as Bulbank, Post Bank and DSK)• BNB - change of policy as regards the restriction of credit extension

0

200

400

600

800

1000

1200

1400

2001

2003

2005

Credits inBGN mln

No. 16


1200


Deposits and credits measured by GDP - dynamics

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

2001 2002 2003 2004 2005

Bank assets in % of GDP

Deposits in non-financialinstitutions in % of GDP

Credits in % of GDP

Commerical credits in %

Credits for privatepersons in % of total

Credits in % of bankassets

No. 17


72%

65%

53%

43%

40%

32%


PARTICIPATION OF SME IN PUBLIC PROCUREMENT - 1

RELATIVELY SMALLER SHARE OF PARTICIPATING IN PROCEDURES ON AWARDING UNDER THE PUBLIC PROCUREMENT ACT (PPA)

RELATIVELY SUCCESSFUL EXECUTIONS OF CONDITIONS UNDER PPA BY SME

PREFERENCES UNDER PPA - VALID UNTIL 2007


No. 18-1


PARTICIPATION OF SME IN PUBLIC PROCUREMENT - 2

OBSTACLES FOR SME PARTICIPATION IN AWARD PROCEDURES UNDER THE PUBLIC PROCUREMENT ACT (PPA)

•ENORMOUS NUMBER OF DOCUMENTS TO PRESENT AND LACK OF QUALIFIED STAFF TO PREPARE THEM

•HIGH GUARANTEES FOR PARTICIPATION AND EXECUTION

•SHORT TERMS FOR PREPARATION

•INSUFFICIENT PRECISION IN FORMAULATION OF CONDITIONS FOR PARTICIPATION

•INEQUALITY FROM THE POINT OF VIEW OF THE VAT ACT AS COMPARED TO FOREIGN INVESTMENTS

•LACKING SUBCONTRACTOR NETWORK


No. 18-2


Unemployment, average annual

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2000 2001 2002 2003 2004 2005

registered

latent

trend

No. 19


11%


Revenue

0

100

200

300

400

500

600

2001 2002 2003 2004

Income total/private person

Income total/person

Costs total/private person

Costs total/person

No. 20



Savings in % compared to GDP

0

5

10

15

20

25

30

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

Savings

Trend

No. 21


26


FACTORS OF STABILITY AND ENCOURAGEMENT - 1

•POLITICAL STABILITY - NATO MEMBERSHIP,

EXPECTED EU ACCESSION – 2007

(SIGNING OF THE ACCESSION TREATY ON APRIL 25, 2005)

•FINANCIAL STABILITY

•CURRENCY BOARD

•WELL-EXPRESSED LEGAL BASIS (COMPANY LAW, TAX LAW, COMMERCIAL AND CONTRACTUAL LAW, COMPETITION LAW, CURRENCY AND CUSTOMS LAW, LABOUR LAW)

•LIBERAL PROVISIONS FOR FOREIGN TRADE

•LAND OWNERSHIP

•LEGAL GUARANTEES (MORTGAGE, MORTAGE LENDING LAW)


No. 22-1


FACTORS OF STABILITY AND ENCOURAGEMENT - 2

•INTERNATIONAL ACCORD PRIORITIES

•DEVELOPED PRIVATIZED BANKING SYSTEM

•LIBERAL CURRENCY PROVISIONS AND FREE TRANSFER OF PROFIT

•GOOD HUMAN POTENTIAL

•IRREVERSIBILITY OF CONDITIONS OF FREE MARKET ECONOMY

•THE EU REPORT OF OCTOBER 2002 ESTABLISHED THAT THERE WAS A FUNCTIONING MARKET ECONOMY IN BULGARIA


No. 22-2


PROBLEMS THAT BULGARIA SHOULD SOLVE - 1

UNEMPLOYMENT AT ABOUT 450 000 OR 12 PER CENT, BUT SOME 300 000 LATENT UNEMPLOYED

SHADOW ECONOMY ESTIMATED AT ABOUT 40 - 50 %

PRIVATISATION IN THE INFRASTRUCTURE AREA TOO SLOW

THE INVESTMENT CLIMATE IS STILL IN THE PROCESS OF DEVELOPMENT (THE TAX SYSTEM HAS TO ENCOURAGE THE COMPETITIVENESS OF THE ECONOMY MORE INTENSELY)

UNSATISFACTORY CONDITIONS FOR CREDITS ON SITE (INTEREST RATE AT 10 – 12%)


No. 23-1


PROBLEMS THAT BULGARIA SHOULD SOLVE - 2

NOT UNIFIED JUDICIAL PRACTICE IN THE FIELD OF COMMERCIAL AND COMPANY LAW, SLOW JUDICIAL PROCEDURES

SLOW TRANSFORMATION OF JUDICIAL DECISIONS

INSUFFICIENT PROGRESS IN THE FINANCIAL SECTOR

MANY PERMITS, PLENTY OF BUREAUCRACY

CORRUPTION AND CRIME

INSUFFICIENT TRANSPARENCY WITH LARGE PROJECTS

LACK OF PROJECTS FOR ABSORBTION OF EUROPEAN FUNDS


No. 23-2


A VIEW OF PROTECTION OF FOREIGN INVESTMENTS - 1

Inviolability of private property stated by the Constitution

Well-expressed general mortgage insurance law

Supremacy of international accords and agreements

Only strictly regulated cases of property confiscation under condition of full compensation; opportunities for legal defence

EU citizens may acquire land ownership;


No. 24-1


A VIEW OF PROTECTION OF FOREIGN INVESTMENTS - 2

Legally provided right to free investment and commercial activity

Equality of foreign investments

Free transfer of profit

Preserving property until full payment of price is legally permitted

Foreigners may be appointed managers without limitation


No. 24-2


TYPES OF SPECIAL PLEDGES AND GUARANTEES USED IN PRACTICE - 1

PLEDGE OF WHOLE ENTERPRISES

PLEDGE OF SHARES IN LIMITED LIABILITY COMMERCIAL COMPANIES

PLEDGE OF SHARES IN JOINT-STOCK COMPANIES

PLEDGE OF MATERIAL ASSETS

– raw materials, materials, goods, produce under production

PLEDGE OF RECEIVABLES

– Contractual receivables, receivables on shares, receivables on bank accounts


No. 25-1


TYPES OF SPECIAL PLEDGES AND GUARANTEES USED IN PRACTICE - 2

PLEDGE OF FUTURE RECEIVABLES

NORMAL MORTGAGE LAW

MORTGAGES

RISK INSURANCE POLICY

THE SPECIAL PLEDGE IS REGISTERED IN A UNIFORM, TRANSPARENT CENTRAL REGISTER WITH THE MINISTRY OF JUSTICE

THE SPECIAL PLEDGE LAW PERMITS DIRECT EXECUTION WITHOUT THE TIME-CONSUMING COURT TRIALS


No. 25-2


LUCRATIVE TAX PROVISIONS15% COPORATE TAX WITH A TREND TO DROP IN THE NEXT

TWO YEARS TO 10 -12.5 %

20% VAT WITH A TREND TO DROP TO 18 %

REDUCTION OF AMMORTIZATION TERMS TO 2 YEARS

ALL OR PART OF THE COSTS ARE EXPECTED TO BE RECOGNIZED AS INVESTMENTS

ALL INVESTMENTS UP TO BGN 500 ARE CONSIDERED COSTS

TAX PREFERENCES FOR OPENING NEW JOBS

PREFERENCES FOR SPARSELY POPULATED REGIONS


No. 26


Direct foreign and Bulgarian investments in EUR mln

0

1000

2000

3000

4000

5000

6000

7000

2000 2001 2002 2003 2004

Totalprivatisation (foreign)greenfield (foreign)Bulgarian investments

No. 27-1



Foreign direct investments in mln US dollars

0

500

1000

1500

2000

2500

3000

3500

4000

'99 '00 '01 '02 '03 '04

Investitions

Trends

Expon.(Investitions)

Total 1992-2005• Austria – 1666• Greece – 1034• Netherlands – 928• Germany – 915• Italy – 716

2004• Austria – 927• Czech Republic – 376• Netherlands – 341• Germany – 252• Greece - 157

No. 27-2



Foreign direct investment and total capital formation in mln US dollars

0

1000

2000

3000

4000

5000

6000

1998 1999 2000 2001 2002 2003 2004

Direct investments

Formation ofcapital

Trend (formation ofcapital)

Trend(investments)

No. 28-1



Foreign direct investments in % of GDP

9,2

5,65

4,4 4,1 3,93,1

2,2

1,2

0

1

2

3

4

5

6

7

8

9

10

Bulgaria Romania Estonia Czech Rep. Slovakia Croatia Hungary Poland Slovenia

No. 28-2



GOOD CONDITIONS FOR DEVELOPMENT OF JOINT SME VENTURES WITH FOREIGN COMPANIES

HIGH GROWTH PERCENTAGE AROUND 5 % LOW INFLATIONNUMEROUS MARKET NICHESGOOD LINKS ON LAND, BY SEA AND AIR15 % CORPORATE TAX - WITH A TREND TO REDUCEWELL-EDUCATED SPECIALISTSLOW LEVEL OF SALARIESUP TO 2007 PREFERENCES FOR PUBLIC PROCUREMENTIN SOME REGIONS - PREFERENCES AND STATE SUPPORTAMENDMENTS WERE PASSED TO THE BULGARIAN

CONSTITUTION ALLOWING THE ACQUISITION OF LAND BY FOREIGNERS


No. 29


Workforce costs (USD)

0

20

40

60

80

100

120

140

1998

1999

2000

2001

2002

2003

2004

Workforce costs

Trend

No. 30-1



Average hourly wage in USD

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008

Hungary

Czech Rep.

Poland

Bulgaria

No. 30-2

1,031,34

3,51

4,63,99

5,73

4,92

6,52



PROBLEMS•FUNDS

•MARKETS

•GOOD CREDIT CONDITIONS

•SHADOW ECONOMY – ABOUT 40 – 50 %

•TRANSFER OF TECHNOLOGIES

•LACKING SUBCONTRACTOR NETWORK FOR INFRASTRUCTURE PROJECTS AND OTHER LARGER SUPPLY PROJECTS

•INFORMATION ABOUT CRITERIA OF INTERNATIONAL FINANCIAL PROJECTS

•TRAINING (MANAGERS, BUSINESS ECONOMY)

•BUREAUCRACY AND TOO MANY PERMITS

•COMPETITIVENESS


No. 31


PROJECTS FOR ENCOURAGEMENT OF JOINT SME - 1

ACTIVATION OF JOINT VENTURES AS THE EFFICIENCY OF THESE COMPANIES DOUBLES FROM THE VERY FACT OF BETTER ORGANIZATION AND MANAGEMENT

PARTICIPATION OF JOINT VENTURES IN INFRASTRUCTURE AND OTHER MAJOR PROJECTS AS SUBCONTRACTORS

TRAINING OF MANAGERIAL STAFF AT MEDIUM AND TOP LEVEL - USE OF PROVIDED FUNDS

SUPPORT OF FOREIGN CONSULTANTS AND ENTREPRENEURS FOR ESTABLISHMENT OF CONDITIONS FOR PARTICIPATION OF BULGARIAN COMPANIES, AS WELL AS WITH FOREIGN PARTICIPATION IN THE EU FINANCIAL PROJECTS


No. 32-1


PROJECTS FOR ENCOURAGEMENT OF JOINT SME - 2

SUPPORT FOR DEVELOPMENT OF DATABASES AND DRAFT OF BUSINESS PLANS FOR EXTENSION OF CREDITS

ENCOURAGEMENT OF GROWTH AND ENHANCEMENT OF COMPETITIVENESS OF SME BY EXPANSION OF SPECIALISATION AND TRANSFER OF TECHNOLOGIES FROM ABROAD

ENCOURAGEMENT OF ENTREPRENEURSHIP BY TRAINING AND IMPROVING THE BUSINESS CLIMATE FOR PRIVATE ENTERPRISES

IMPROVEMENT OF OPPORTUNITIES OF SME ACCESS TO SERVICES, PROGRAMMES, NETWORKS AND FINANCIAL SOURCES OF THE EU


No. 32-2


This report is based on data of the National Statistical

Institute, the Small and Medium-sized Enterprises Agency, the Bulgarian National Bank, the International Monetary Fund, the Bulgarian Investment Agency, the Ministry of Labour and Social Policy, the Ministry of Economy, the

Bulgarian Chamber of Commerce and Industry and various commercial banks. The data for 2004 has not been finally confirmed by the National Statistical Institute, at which we

have only forecast data for 2005. This report constitutes the author’s own analysis and

does not thereby bind any institution.

stagnation or progress of sme in bulgaria from the point of view of the foreign investment

Documents

progress of sme

importance of sme

bank credits

foreign direct investment

investment rating levels

free information

pagegdp inbgn mln

electronic signature