Bulgaria: Unready for EU, Successful in Private Enterprise

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Bulgaria: Bulgaria: Unready for EU, Successful in Private Enterprise Flags are rolling down from all official buildings of Bulgaria ??“ hailing the country??™s accession to the European Union, on January 1. Photo by Yuliana Nikolova (Sofia Photo Agency)

Reform-weary, riddled with crime and corruption and wholly unready for EU membership - it seems the European Commission will have to keep the pressure up on Bulgaria after accession. Nevertheless, private enterprise has been successful, with far faster growth than in western Europe.

By Justin Keay
CNBC European Business

There were few surprises in Bulgaria's October presidential elections: Socialist incumbent Georgi Parvanov won despite low turnout, necessitating a second round against Volen Siderov of the vehemently nationalist Attack Party. Yet the fact Siderov did as well as he did (in a feeble turnout of 41%) confirmed how Bulgarians, like others in reform-weary eastern Europe, are disillusioned with their lot. They have more reason than most. After eight years of reform - first initiated after Bulgaria came to the brink of collapse in late 1997 - the lack of a feel-good factor in this country of 7.5 million is manifest. On the plus side, there have been macro-successes, thanks to the stability generated by a currency board and fixed exchange rate, which takes monetary policy out of the hands of the government. GDP growth in 2006 should be a respectable 5.7% (with much the same expected for 2007) with inflation around 6%. The biggest concern is the current-account deficit, presently around 12%. With EU accession a given, foreign investment has been respectable at around €2bn a year with investors targeting agro-industry and light manufacturing in particular. The tax system has been reformed, and is fairer and more transparent for individuals and companies alike, although many legitimate businesses claim they are being unduly targeted because illegitimate businesses are so hard to trace.

Yet there is a sense that while even Romania has attempted to grapple with the legacy of the past, implementing tough action against corruption and putting senior politicians and others in the dock for graft, Bulgaria has allowed bad old habits to fester. The performance of the government formed after the 2005 elections - a creaky coalition of Socialists, the National Movement for Simeon and the Movement for Rights and Freedoms, the party that represents the Turkish minority - has been unimpressive, in part because ministers report to their own party rather than to PM Sergey Stanishev, but also because with EU membership all but assured, any sense of urgency is missing. The political scene is still evolving: the splintering of the right that allowed Attack to emerge as a protest party has also left a largely unreconstructed Socialist party dominant and unaccountable. Privatisation has slowed to a crawl, and the national airline, regional electricity companies and many other institutions besides remain in state hands. Bulgaria's big achievement - being given the green light to join the EU in January 2007, together with its neighbour Romania - is clouded by the fact that Brussels and just about everybody else deem it the least prepared country ever to join, with much to do in reforming the judiciary, public administration and other key areas, notably air safety. Organised crime and corruption - at all levels - remain key concerns despite some half-hearted prosecutions against state officials.

Ruslan Stefanov of the Sofia-based Centre for the Study of Democracy says this unsettled business environment has very real implications for SMEs and foreign investors. The former because rather than allowing themselves to grow organically, many chose to splinter to drop below the radar of organised crime groups (and the tax authorities); the latter because at some stage they will find themselves having to deal with such leading conglomerates as VIS, SIC and TIM. "These groups - and others - still dominate the economy, although with Bulgaria in the EU, one would expect them to become more mainstream and legitimate," he says.

That isn't the only change that observers expect accession to have on Bulgaria's company structure. Many companies - especially SMEs - are expected to fall by the wayside once faced with the new reality.

"I anticipate many bankruptcies over the next two years as such companies real-ise they must play by new, tougher rules, but in the long run they will be replaced by more transparent companies that play by European rules," says Maxim Behar, head of the M3 Communications Group, a leading Bulgarian media relations firm. If Bulgaria is to deal effectively with corruption, it urgently needs a legal system that punishes effectively and a value system that makes people realise bribery is wrong. "For too many people, the expensive car these guys drive or the glitzy clothes their wives wear are more important than questions about how their money was earned," he says.

With just a few weeks before accession becomes reality, Sofia's key task is to avoid the indignity of having Brussels withhold much-needed funds or take other threatened steps, such as ignoring the decisions of its judiciary if key reforms there are not implemented. The omens do not look good - indeed the quarrelsome coalition may fall apart soon after 1 January once it feels it is not so much on the Brussels radar, succumbing to the reform weariness currently endemic in the region.

However observers are cautiously optimistic that the desire to boost growth and improve living standards will enable momentum to be maintained. "We're late, we're slow but we're moving in the right direction," says George Prohasky, co-head of influential think-tank the Centre for Economic Development, adding however that the EU will have to continue pressuring Bulgaria. "History has shown that this country only moves forward when it's prodded - by the IMF, World Bank or EU. Outsiders should keep this in mind if they want to see Bulgaria realise its true potential."

BULGARIA IN FIGURES

Population
7.7 million
GDP
€20.75bn
Per capita GDP at PPP
€6,881
Expected GDP growth 2006
6%
Anticipated end-year inflation 2006
3%
Anticipated BOP deficit/surplus for 2006
-13.7%
Investor information
www.investbulgaria.com
Estimated number of days to open a business
30
Transparency International Corruption Perceptions Index position (of 163; 1=least corrupt)
57
Position in the CNBC European Business Investor Attractiveness index, out of 10
5

Flowering in difficult soil


Bulgaria's Agropolychim fertiliser business is booming - despite overbearing bureaucracy and a revenue service that allegedly targets good payers rather than the grey economy

Sitting in Agropolychim's sparse office in Sofia's business district - the fertiliser company's HQ is in Devnya on Bulgaria's Black Sea coast - CEO Philippe Rombaut describes himself as a "happy frustrated investor". The happy part is evident. Since Agropolychim was privatised for the princely sum of $1 in 2000, the Belgian and his partners have turned the company around: debts (which had exceeded €55m) have been cleared, some 2,200 of its 2,400 workforce were fired (and replaced by 800 newly recruited individuals) and some €40m invested as part of a long-term investment plan that will see a further €40m-€50m invested to boost turnover from the current €130m to over €200m. Today, it is the leading fertiliser company in the Balkans, exporting 60% of output to everywhere from "Peru to Bangladesh". It also has ambitious plans for the future, including making significant improvements to its core product line (nitrates and phosphates). The Bulgarian Chamber of Commerce has been so impressed by Agropolychim's phoenix-like revival that it has given it a Best Leading Company award.

Rombaut - a nine-year career veteran of Bulgaria, having previously worked for Union MiniГЁre Bulgaria and managed a fund for George Soros - doesn't hide his satisfaction: "The great thing about Bulgaria is that you can see your business grow by 30%-40% in a year: compare that to 2%-3% growth back home."

Today, however, Rombaut is frustrated. Like other investors in Bulgaria, he laments the corruption and bureaucracy that is a daily part of business life. "Try getting anything done and you find you have to pay to speed the process: it will take at least 25 years for corruption to get to a level even remotely acceptable by mainstream European standards," he says, suggesting that the lack of proper decision-making has really undermined Bulgaria's potential. "I wonder what we might have achieved without wasting time on officials," he says.

One of his biggest problems is the taxman. A World Bank programme aimed at improving tax collection among people not naturally inclined towards such an activity is having a positive effect: the National Revenue Agency, set up in January, reports reduced evasion from Bulgaria's large grey economy, estimated to be 25%-40% of GDP.

"We've already had success simplifying regulations and rates and easing bureaucracy: this has led to improved levels of collection," says Maria Mur-gina, the NRA's executive director.

However, Rombaut and other investors say the NRA has been targeting good payers and seemingly giving up on the bad ones, because making them pay their dues is just too hard; small businesses are particularly badly hit as they lack the facilities to fight. VAT is a particular bugbear: registration can take months, requiring visits by various echelons of officialdom, while getting refunds can be akin to drawing blood from a stone. "You are meant to get your money back within 30 days; we've been waiting for Lev 600,000 (€300,000) for nine months," he groans.

Rombaut isn't about to give up on Bulgaria, though. He will soon help launch Trace Capital on London's AIM, a fund specialising in basic and agro-industries in Bulgaria and Romania: in all he hopes to raise €150m. "Forget real estate: that's where the Mafia and people who don't want to get their hands dirty go. The real opportunities here are in these so-called unglamorous industries."

Grape expectations



Bulgarian wine is raising its game with world-class wines produced by the likes of Ivan Todorov

Sunday mornings are usually pretty quiet in the village of Brestovitza, 10km outside Plovdiv, but it's all go at the Todorov winery. Trucks are bringing in building materials, visitors are double-parked in the street outside and workers are putting the final touches to the new visitor centre/hotel which owner Ivan Todorov hopes will be finished by the end of November. "We had around 7,000 visitors just from Europe this year and expect more next year: this hotel will make this even more of a destination than it is today," he says, proudly showing off the furnishings in the honeymoon suite.

The winery has already had its first VIP visitor, the prime minister of Denmark, who stayed a night in September and apparently liked the wine so much he went to bed several hours later than usual. He's not the only fan. Although Todorov only bought the winery five years ago, making his first vintage just four months later, renowned British wine writer Jancis Robinson has called his reds "world class" - unprecedented for Bulgarian wine, which has been in the export doldrums since its popular heyday in the 1980s and early 1990s. Indeed, Bulgarian embassies around the world serve Todorov's wine with pride - "The best free advertising I could hope for," he says. Certainly a visit to the Todorov boutique in Sofia's ritzy Sheraton Hotel - showcasing Todoroff Gallery (the Mavrud, made from Bulgaria's best-known native grape, is particularly recommended), Teres, the mid-range wines (with 10 months in the barrel) and the delicious, smooth Thracian Mystery, his top-end blend - confirms the winery's success.

Like many in Bulgaria, Todorov built his fortune in construction during the 1990s, when his companies were active in such key markets as Germany and Austria. "You know, the main reason I started this was because I love wine but was frustrated that nothing good was being produced in Bulgaria: I wanted to make quality wine, not necessarily start a business," he says.

When Todorov bought the winery it - like many others in Bulgaria - had almost collapsed from lack of investment. His first harvest was just 8,000 bottles, but this year the winery should produce 360,000: a recent acquisition of land is expected to eventually push this figure to 650,000, with reds, which grow well in the fertile Thracian soil, predominating. With prices at €6-€7.50 in Bulgaria, his wines are considered top-end (especially with alcohol tax at 0%).

However Todorov argues this is the place to be if Bulgarian wine, which in the 1980s was one of the country's big success stories, is to recapture the magic it lost after the fall of communism, when land restitution claims, economic crisis, plunging quality and New World competition all took their toll.

"The last few years have been very bad for the industry but I think we are beginning to find ourselves again, and gain wider recognition. Some of Bulgaria's 160 wineries will go under but many will benefit from new money being brought in by people like me."

Around town: Sofia


A pleasant restaurant and cafГ© culture, a crop of new hotels and the Mall of Sofia are beginning to raise the Bulgarian capital's image

For businessmen familiar with central European capitals such as Budapest or Prague, Sofia comes as something of a shock.

Lacking obvious attractions such as Buda Castle or Charles Bridge, at first sight the busy Bulgarian capital looks very Balkan, a city where westernisation has been slow and inconsistent and the streets grimy. Although smart new restaurants and shops have opened to cater to the growing middle class, a visitor returning today after a gap of, say, five years might feel little has changed.

Appalling traffic, cratered roads and collapsing infrastructure can be blamed on a city administration whose inaction reflects a grim combination of corruption and incompetence. Many disgruntled inhabitants say the best thing about their city is the speed with which it can be left: nearby Mount Vitosha is a favourite getaway for locals in summer and winter alike, while one can also be on the slopes at Borovets, Bulgaria's oldest and most distinguished ski resort, in 75 minutes.

Yet scratch a little deeper, and Sofia has its charms. The inevitable starting point is the Orthodox Alexander Nevsky cathedral, an impressive pile sitting in the centre of the city near to which a street market selling post-communist souvenirs, fake watches and other trinkets operates most days of the week. The Sheraton Hotel - a member of the Leading Hotels of the World group - is great for a coffee. The recently restored, UNESCO-protected St George Rotunda, the capital's oldest church, lies in the courtyard behind.

And although shopaholics are unlikely to be impressed by most of the wares in its shops, a walk down pedestrianised Vitosha Boulevard with its bustling cafГ©s and restaurants to the communist-era National Palace of Culture (NDK), a multi-purpose entertainment centre, is well worthwhile.

Yet with EU accession achieved, things are at last looking up. Although the Sheraton is still much the best place to stay, a recently opened Hilton - next to the NDK - and a Kempinski, whose appeal is lessened by it being slightly out of the centre, have widened choice for business travellers. And within the last two years, three modern shopping centres have opened; the most central, the 75,000 m2 Mall of Sofia - recently sold for a handsome €90m by the Israeli group that bought and financed it - is a startling sight for those accustomed to the Bulgarian capital, with smart shops, coffee bars and cinemas all under one roof in a part of town once considered a no-go area.

"Sofia will not be the same now: this mall will encourage other investors to come," says long-time resident Maxim Behar, arguing that the city could easily absorb two or three similar-sized malls. In the meantime, visitors will have to make do with more traditional activities such as eating out. This is something Bulgarians do often, well and relatively inexpensively, washing down mainly meat-based dishes with hearty and generally improving local wine.

Try Bulgaria's two main indigenous grape types: full-bodied Mavrud - usually from the Plovdiv region - or the softer, more subtle Melnik from near the Greek border. Although good restaurants dot the city, the trendy Doctor's Garden area - near Sofia University - has the best and most eclectic choice.

Property's late riser


Real estate is finally picking up in Bulgaria, with prices growing far more dramatically than expected as foreign investors pour in.

With EU accession guaranteed, low prices and a swathe of ongoing new developments on the coast and in leading ski resorts, the odds were always high that Bulgaria's long-neglected property sector would pick up. In the event, it has taken off faster and more dramatically than anybody anticipated, with ever-acquisitive British and Irish investors leading the way and estate agents targeting foreign buyers springing up even in smaller towns and cities. With developers planning more shopping malls in and outside leading Bulgarian cities, and demand for quality office space high, commercial property is starting to look a good bet, but residential property has been most active with prices over 2006 estimated to have risen by around 18%.

"Since 26 September [when Bulgaria got the nod to join the EU in January 2007] there has been a big up in interest: people are making decisions faster because they think prices are going to rise," says Rossen Dimov of the UK-based Bulgarian Property specialist Rockarch Properties, admitting that many buyers are veterans of the Polish, Czech and Hungarian markets where prices leapt after EU accession.

So where exactly have people been buying? The first wave of buyers went straight for Bulgaria's Black Sea coast, targeting communist-era resorts such as Sunny Beach where studio apartments still go for €30,000. However, more recent buyers, put off by the downmarket fish, chips and beer image of such places, have been looking at Sofia and at Bulgaria's four leading ski resorts (Borovets, Bansko, Pamporovo and the latest arrival, Perelik) which can be let year-round. Investors have also been targeting new, more upmarket coastal developments and historic towns in the interior such as Plovdiv and Veliko Turnovo.

By European standards, prices are still keen. In Sofia, although apartments in the highly desirable Doctor's Garden area can fetch up to €2,000/m2 - making it a favourite with ostentatious Russian buyers - apartments in the pleasant Ivan Vazov area go for around €1,200/m2, while those wanting to take a punt on commercial property could consider Bulgaria Boulevard or Manastirski Livadi, an area some 15 minutes from the centre, targeted by the government for redevelopment, where per-metre prices start at €700. On the coast, Balchik (north of Varna) is proving popular, not least because it is home to three golf courses, while to the south Obzor - between Varna and Burgas - is being developed as an exclusive upmarket resort.

In the mountains, Dimov says Perelik, near Pamporovo, is well worth a look. Growing fast, a studio apartment here costs around €32,000, a one-bed, €54,000 and a two-bed, €70,000. With prices per square metre between €765 and €1,165, Perelik is cheaper than Pamporovo, where the per-metre price is €900-€1,300, and much less than trendy Bansko with its happening nightlife, where the range is €1,100-€1,700. Also worth considering are spa resorts, which Dimov and other agents say are becoming increasingly fashionable in Bulgaria.

With the EU promising to pump some €6.6bn into Bulgarian infrastructure over the next five years, Bulgaria's cities and resorts are going to start looking rather smarter. "Since transition started 17 years ago, Bulgaria has never seen an influx of such money: it's going to make a huge impact," says Dimov. Against such a backdrop, expect prices to rise.
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» To the forumComments (3)
#3
Mat - 19 Jan 2007 // 09:42:38

Corruption only exists because people pay it, so I have little sympathy with these people complaining - how else do you get to buy a company for a dollar?

#2
shepton - 5 Jan 2007 // 22:07:17

day 5
bring back 0/; don't worry, dirk, fra th bureaucratic point of view, things can only get worse)))

#1
Dirk - 5 Jan 2007 // 17:21:18

WTF is going on with the information for companies. No supplier can't make us an invoice.

Today someone from our administration told me we can't use our computerprograms no longer to make invoices because it needs to be from a F*ing certified company.

When is Bulgaria going to wake up from communism and over-regulated details? Damn they should stimulate bussinesses but all they do is making it more and more difficult. There is no information available anywhere.

If this goes on, they should take this sh*thole country to court, in order to get them organised. BTW, what about regulated and not regulated companies? This is the only country, I know, with a system like this.

/0 once told me this is 5th world country. I strongly disagree it is a 50th world country.

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