Interview with Nicholas Jeffery, Senior Advisor, Investment and Strategic Planning, Telecommunications, Informatics and Media, and Vera Blagev, Associate Banker, Telecoms, Informatics and Media, European Bank for Reconstruction and Development

More information about Nicholas Jeffery is available at http://www.novinite.com/view_news.php?id=103525

A Nicholas Jeffery article on Bulgaria the "Balkan Tiger" in software development is available at http://www.novinite.com/view_news.php?id=103522

What is the activity of the European Bank for Reconstruction and Development centered around in Bulgaria in terms of IT and telecommunications?

Vera Blagev: The European Bank for Reconstruction and Development was founded in 1991 in order to help countries that were part of the former Soviet Bloc develop into market economies. Since then we've become the single largest investor in Central and Eastern Europe, and we now operate in 30 countries, from the Czech Republic, all the way to Bulgaria, and even as far away as Turkey and Mongolia.

So the unique thing about EBRD is that while we are owned by more than 60 governments and intergovernmental institutions, what we do specifically is help the private sector. We invest in private companies, we help bring in money from other private sector institutions, private equity partners so forth, to help the market economy develop.

Nicholas Jeffery: Our strategy has changed over the last 18 years. EBRD was originally involved in privatizations, large telecoms moving into mobile, WiMAX, broadband and everything else. What we've learned over the last few years is that we've had to evolve because our audience has changed. Ten years ago we would be doing a large privatization like the Bulgarian Telecommunications Company, and supporting going from a state-owned monopoly into a private business.

Now the infrastructure in Bulgaria is almost there even though there are patches of issues. We see that there is one area around data centers that need to be brought up to a world class standard because there is international legislation determining how data is stored, how it is kept securely, and we think that those sorts of things need to be invested into in Bulgaria. So that's the last piece of infrastructure effectively that we will be looking at.

We are now moving to an area which is looking at the operating layer to understand how people get content and how they interact with it. We are looking at software as a service. This includes software as a service in terms of the financial services industry, and portals in e-government, e-health, and e-education, where we are funding the private sector to do work on behalf of the government.

We believe that our role is two-fold. First, we have a commercial imperative like any international bank. We are a commercial organization that expects a return on investment. That's why it's a healthy bank. So we would expect to review businesses anywhere in our 30 countries on the basis of their business plan, the market dynamics, the product and services, the management team, and the commercial return.

But because we are also called the Bank for Reconstruction and Development, we have a second mandate, and the second mandate is two-fold. First, in terms of corporate due diligence, corporate governance, financial reporting, best practice in terms of business processes - what we are looking to do is bring ideas, and bring a level of professionalism and transparency to all the projects that we bring.

The second thing is, because we have a reconstruction and development mandate, we are looking to see where we can add an impact over and above the money. So if you are the fourth WiMAX operator, I am not sure as a bank what value you can bring because there already is a competitive environment. If you are the fourth, I am not sure what you can do, and I am probably not going to invest with you.

But if your mandate is to go to the regions, rather than just concentrate on the cities, or if your mandate is to concentrate on portals that deliver e-government initiatives, then all of a sudden your mandate value goes up regardless of your commercial mandate. So what we are trying to do is balance the projects that we do in Bulgaria between the large corporate initiatives that need a lot of cash, that would take a long time to do their due diligence, and that would be investing over a longer period of time.

We are also trying to look at the other end of the scale, the medium-sized enterprises. We can't do start-ups. We are too big, we are too cumbersome to do start-up projects. But what we are trying to do is we have fast-tracked or streamlined a process by which medium-sized companies can interact with us, and we can disperse money.

So we are looking for companies in Bulgaria, and over the next nine months we will probably find seven to ten companies that we think are appropriate for us to invest with. Those companies will be mid-sized organizations that have got some traction. They are either about to become profitable, or have already gone profitable, you know, anywhere between 30-50-150 staff, but they have got an expansion mode. So they potentially wanted to go to IPO on the Bulgarian market a year ago, pulled it, because the market got soft, but they still have aspirations, they still want to go global, regional, but they need cash.

So when you look at the market, EBRD is doing three things. The first thing is, it is investing direct. Now, we can only invest up to 35% of what the company needs, and that could be an equity where we take a shareholding, and a board seat, and that could be debt.

The next thing we are doing is investing into private equity firms. So we are investing into private equity that then lends. So we can own up to 30%-35% of a private equity firm, give them the money, they go out, and manage those businesses.

The last thing we do is we invest into banks, and the banks make as well those direct microloans to businesses. So what we are trying to do is get money into the system. As quickly, and as appropriately as possible. So when we take an equity position, in most cases what we are trying to do is add value over and above the money.

Money is difficult to come by but when you get money, you want it to be relatively smart money, you don't want it to be intrusive, and constantly looking over your shoulder and guessing, telling you how to run your business, but you want it to be smart money. So where the unique selling proposition of the bank in the telecom sector is that no one else can match the spread that we have.

We are a member of the Bulgarian Association for Information Technologies (BAIT), and out of a 270 members, I think it would be fair to say that 230 probably wouldn't think of EBRD as an investment partner. They know us for dams, roads, big energy projects, and infrastructure but what we are saying is actually, if you look at that unique selling proposition, actually, we could probably be the first port of goal, not the last.

In a recent article, you describe Bulgaria as the "Balkan Tiger", an emerging global player in software development. Why?

Nicholas Jeffery: We are really enthusiastic about Bulgaria for several reasons. First, geographically, we think we are at a perfect crossroads, east-west. You know, we just invested in the underwater submarine cable going from Georgia to Varna, which is a real boost to the economy in terms of getting traffic east-west.

We also think there is a bringing together of almost of a perfect storm because we think the broadband coverage, WiMAX, mobile, is getting to that point where it is almost ubiquitous, it's there, it's robust, there are issues but it is getting there. The third thing, just the most important is where we talk about Bulgaria as becoming the Balkan Tiger in telecommunications and media technology is that there has been an interesting dynamic we have seen over the last 3-4 years.

20, 15 or 10 years ago, if you were a software developer in Bulgaria, you wouldn't be here. Because you could earn so much more money, and there were so many more interesting projects elsewhere - the USA, the UK, France, Germany, anything else. And you could earn five times more money.

Now, however, price differentiation in terms of wages has narrowed. So you might be earning, let's say, 20% less than your colleagues in Silicon Valley. But now we are up to that point where if you are a Bulgarian developer, you can work on some very small projects here. You earn a fair amount of money, you are pretty well respected as a professional, and to be honest, you don't need to leave home anymore. So your friends, family, lifestyle, and anything else. So we are seeing a lot of people coming back.

So the talent pool, connectivity, and geography are coming together, and if we can be the catalyst in terms of funding, we think we can create something within Bulgaria that really stands out. We believe that Bulgaria needs to stand for something in IT and telecommunications. So you know, everybody knows what you use New Delhi for. Everybody knows what you use Mumbay for, everybody knows what you use California for.

When you say what is Bulgaria famous for in telecoms, I don't think anybody really has anything. And what we are saying is, if Bulgaria says it, the response is "You would say that, wouldn't you, because you are Bulgarian.". We think that if EBRD says it in terms of we honestly believe that Bulgaria has the opportunity to become this Balkan tiger in terms of software development, one, the fact that EBRD is saying it, is strong, and the second thing is, we are putting our money where our mouth is. So we are not just saying it like an economist, we think it can be the best thing since sliced bread.

We are saying it, we think you can be very good, we want to help you be very good, and we are going to invest. So over the last six months we found three or four opportunities, over the next six months we have to find another three or four opportunities that we think we can invest in.

And they are all around the top part of the iceberg. They are all around a little bit of infrastructure but the light end of infrastructure not networks, we are looking at data centers, software as service, hosted applications, those things. And then the last piece we are looking at content, which is anything from e-government, e-health, e-education, consumer-generated media, music, news, all of those pieces as well. And we know they are going to have challenges because they are small, more entrepreneurial, the asset leaves the door at the end of the day because it is people, it is not property. But we believe these are all quantifiable and worthwhile risks you can take.

Vera Blagev: A couple of examples. Our goal is for 2009 to look at seven to ten projects in the different stages of the projects, and mainly there's a couple of companies that we are currently in dialogue with that we find especially interesting, and we want to use as examples of the types of companies we would like to support.

One of them is called Teracomm. And what we find interesting about that company is one of the innovative services that it provides - the fact that it provides content for mobile phones, and it goes above and beyond the traditional ringtones and wallpapers, it goes to voice over mobile, mobile marketing, mobile advertising, all these things, which are more unique than has been done in the past. But the other ambition that we appreciate is that their goal is to grow outside of Bulgaria.

They recognize that a lot of technology companies in Bulgaria do, that ultimately Bulgaria while a good market, is a relatively small market, and that in order to really be successful, you need to go outside of Bulgaria. So what Terracom is doing is its expanding regionally and it's expanding outside of the region so to places like Asia and the USA, which tend to be more lucrative at this point so that's one of the examples of a company that we think has real promise.

Kontrax is another company that we think is really interesting. They are a systems integrator, and are capturing a unique window of opportunity that Bulgaria has right now. As a recent EU entrant, there's obviously a lot of focus on Bulgaria getting caught up with other countries in the EU in terms of getting of the digital gap, and all these buzz words that you hear, but essentially getting to a level where technology is used to better society in terms of e-health, e-government, all those good things.

One of the main projects of Kontrax is working with the state in getting all these sorts of projects done, but again it also has bigger ambitions, potentially regional expansion, but this was one of the companies that was affected by the financial crisis. Last year as a result of the market turning against it, it decided to wait. But in terms of the spirit and ambition that both of these companies show, that's the type of company we want to support - entrepreneurial, ambitions, with a vision towards, a bigger global market.

How has the global financial and economic crisis affected the EBRD activity in the IT and telecommunications sector?

Nicholas Jeffery: I think there are three specific answers to that. First, EBRD's response September-October last year was dramatically the amount of money it was going to put into Eastern Europe. So it took it from just over 5 B up to EUR 7 B so I think that's the first response. You need to put money into the system. So that's being put into the state sector, the banking sector, the private sector.

The second thing in terms of telecommunications and media, our involvement in the project gives other organizations the comfort and the confidence to know that EBRD is there so they are prepared to take a little bit more risk in this period of turmoil, knowing that EBRD is actually priming the pump.

The third thing is the sector specifically. Actually, in this market where cash is scarce, IT outsourcing actually flourishes. If you looked back to 1992, and the crisis in Russia, or 1994, and the crisis in the UK, IT outsourcing actually increased because medium sized enterprises actually believe that headcount is the most expensive element of IT, not IT capex.

So they are trying to outsource it to make their cost variable so they've got some control of it, over what's going on. So IT outsourcing, software development, sweating your asset in terms of you have a portal and you want to generate more average revenue per user, or you have a mobile phone and you want to increase minutes, or you've got a point of sale term on your bank, you want to get more and more activity.

So we are finding that IT outsourcing is holding up, software development, which is improving productivity, is holding up, and where you have an existing device and people are making more revenue for that operator is holding up as well. So we believe that valuations have been depressed, there's no getting away, we don't really believe that valuations haven't been depressed. But we are still investing, and we are investing heavily, and we believe that the Bulgarian market specifically has a real opportunity to capture a good share of what the European Bank is going to be investing.

What is the quality of the Bulgarian work force/talent pool in the IT and telecommunications sector?

Nicholas Jeffery: I think it's not just us saying it, that's the first thing. You know, for HP to decide that they are going to put investment here, for CSC to decide, you know they have there choice of anywhere in Eastern Europe. In fact, anywhere in the world. But they have chosen to come here. So they do a lot of due diligence, and the bank does a lot of due diligence.

And we believe that the price, the salary differential which initially looks like it's going to be a problem, is a actually an advantage because it means that if you graduate from a technology university in Hungary, or in Bulgaria, you don't have to go away. You are going to get a little bit less but actually there is now a balance, which is a lifestyle salary balance. So we believe there are two things that are attracting developers to stay or to come back - one, the quality of the work, you know, developing for Google Android, iPhone, Vista, for all of these platforms is exciting work.

Developers are an interesting animal. The quality of life and the quality of work is a balance against salary. If you are a salesman you are probably driven by salary, salary, salary. If you are a developer, you want a really interesting and varied work, and I think a lot of these projects are happening here. There are some very interesting projects in media to mobile, in the entertainment sector, and the news sector.

So if you are only discounting your salary by only 15-20%, you can live in the country where you were born where all your friends are, and do a really good job, I think you'll stay. I think what needs to happen from a government standpoint, I believe that continuing training is critical.

So aftersale service is what I would call it, which is you've got to get into that post-graduate environment, you've got to have Cisco-accredited training, you've got to have HP-accredited training, these academies need to be set up and funded, industry needs to fund them and government needs to fund them. Also, I think that this incubator environment needs to happen. I was in Hungary with the new PM of the country, he was the Minister of Economy, and he's developed three or four really interesting projects.

One is called Budapest Kitchen. And the Budapest Kitchen is funded by a division of T-Mobile and industry, and that is an incubator of new ideas. They also put money into universities to develop a mobile application development center. So they build a GSM network, a WiMAX network, and they are testing applications and ideas. And they've come up with a project which turns script into multiple software languages. So I think what would be really useful is to look at projects like that, to see how you can start to incubate ideas, to incubate initiatives.

And then the role of EBRD is to potentially look into supporting those in their infancy, and then when they come up to bankable projects, then EBRD looks them from direct investment, so I think it needs to be from the top down working on these initiatives, and from the entrepreneur up working on these initiatives. And I think then, combined with your geography, access, and anything else, Bulgaria could then very easily be a Balkan tiger.

How does Bulgaria compare to the other countries the EBRD is operating in?

Nicholas Jeffery: They all differ dramatically. If you think that our region goes from the Czech Republic all the way to Mongolia, and there could be no two more different countries than Mongolia and the Czech Republic, and in the middle we have Russia. They are so different. But as a measure there are two ways of looking at them.

One is what is the investment profile looking like. Now, I don't think you should at volume. You shouldn't look and say last year we had 100 M from EBRD, this year we only had 10 M, there's a problem. I think we should look in terms of how that money is being put to work, and who is using it. So we are investing smaller amounts of money into smaller companies who actually have the ability to make a maximum impact. So 10 M EUR today is probably like 100 M five years ago, because of the impact it has on the community.

Because now we have moved up into content, we've now moved up into applications. We also have ETC countries, which are early transition countries. We have Albania, and we have Georgia. Their needs are very different because what they need is infrastructure. So WiMAX deployment, mobile deployment, so their sums might be bigger but because they are in a different part of the evolution or the maturity stage. So what I think is important is to create an infrastructure that can catch the maximum amount of money.

So to create an awareness that EBRD are here I think is the first point. Because it is crazy for us to sit on money that can be invested that nobody knows we are even here. It's one of those awful things we know we are doing it but you don't. So the first thing is letting the broadest audience know we are here.

The second thing is then understanding there is life outside Bulgaria. And the nice thing about technology companies is they know they've got to export because the audience in Bulgaria just isn't big enough for telecommunications and technology just to look at the seven million population.

The third thing I think in terms of investment is the fact that we are bringing direct investment into Bulgaria as well. So for every euro we invest, we need another two but that could be in intellectual property or it could be in hard cash. So we are bringing companies from the UK, the US into Bulgaria who are going to attract other investors and other people.

Why is Bulgaria a tiger, and not a lion?

Vera Blagev: We've talked about that. I did say that if we want to be more culturally correct, it should be a lion, not a tiger. But, you know, there are the Asian economic tigers, and Ireland is the Celtic tiger, so this is sort-of to fit the pattern.

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