Exclusive interview of Novinite.com (Sofia News Agency) with Nikolay Brankov, Managing Director of Industrial Developments at SIENIT Holding.

Brankov is in charge of managing five industrial zones in Bulgaria created by SIENIT holding, a private Bulgarian construction company, in some cases in cooperation with other private partners.

Four of those are in Southern Bulgaria, the Plovdiv region - Rakovski, Kuklen, Maritsa, Parvomai; one - Letnisa - is in Northern Bulgaria near Lovech.

You are in charge of the following industrial zones in Bulgaria: Rakovski Industrial Zone, Kuklen Industrial and Commercial Zone, Maritsa Industrial and Commercial Zone, Parvomai Industrial Zonе, Letnitsa Industrial Park.What is the structure of these industrial parks? How are they managed?

These projects in their development phase were all 100% owned by Sienit Holding through some of the FPVs we created specially for the purpose because they are individual companies, each industrial zone is an independent business managed as part of the structure of Sienit Holding.

In some of the cases, the ownership of the industrial zones is 100% of Sienit Holding, other cases we partner with other companies, usually splitting the shares 50-50.

For example, in the Kuklen Industrial Zone, Sienit Holding has a share of 50% and KCM SA has a share of 50%. KCM is one of the largest factories in the Plovdiv region, and the Kuklen Industrial Zone is a natural expansion of the industrial complex they created.

The Rakovski Industrial Zone was set up as a purely greenfield investment, and is 100% owned by Sienit Holding. In the Parvomai Industrial Zone we have partners with a 50% share.

I manage the industrial projects of the group of Sienit Holding, which means that I am either the sole manager as in the Rakovski Industrial Zone, or I am one of two managers, as, for example, in the Parvomai Industrial Zone where we have partners.

So all of our industrial zones are 100% private. This means that we developed them, prepared the detailed organization plans, and prepared them for investors. At the beginning these projects belonged 100% to the developer. Subsequently, when the investors arrive, there are two options for the ownership.

In the first case, the investors become the owners of plots and projects in the industrial zone, and in the second, we retain the ownership and rent out the facilities to the investors. So the ownership at present is either what it was at the beginning – with us the developer letting out the facilities, or the investors buy plots and facilities that we created for them.

What has been your company's philosophy behind the development of your industrial zone projects?

Our idea as a developer has been the following – we try – and I would say that we succeed to provide each of the investors with a full package of services in one place. This means that we provide them with the end product executed according to their requirements. We are the leading party in the entire process so they don't have to deal with anything else other than their original activity, which is manufacturing or logistics.

We start with a plot, then we go through the planning phase, we carry out the entire administrative procedure for changing the status of the land, we construct the facility, and we deliver it to them so that they operate in it. We manage to do this in rather short periods, which makes the service competitive.

This is largely because our holding includes a construction firm, a project management firm, planning firms, firms for producing construction materials that we use for building the industrial facilities.

So we try to lock a large part of this cycle inside the holding group so that we can be more competitive. Because if we can talk directly with smaller and mid-sized investors, when we deal with larger companies such as ABB, we have to bid in tenders that we have won in order to attract them to the respective facility. 

How long does it take to complete one of your industrial zones?

The Rakovski Industrial Zone, for example, started in the summer of 2004 so what can be seen on the photos has been accomplished in 6 years. Another indicator is that an average industrial building of 10 000 square meters is completed and delivered to the investor in 9 months. 

You are a private company. What are you relations with the InvestBulgaria Agency and the "National Company Industrial Zones"?

We have been working with the InvestBulgaria Agency for many years. We have signed an agreement for attracting foreign direct investments, and we have been partnering exclusively on the operational level meaning that we have tried to serve the interests of every single foreign investor that tries to develop such a project in Bulgaria.

The Agency is aware of projects, and when a potential investor asks to see industrial zones in Bulgaria, we cooperate.

Our solutions are individual for every single investor meeting their respective requirements. On the whole, even though from the outside the industrial buildings seem standard, each of them has very specific detailed requirements. Each of these projects – from start to completion – has been developed individually – space distribution, height, light, loading space, outside areas, etc. 

Are you able to provide specific figures about the amount of investments in the industrial zones that you manage, the number of people employed there? 

This is complicated for several reasons. I can provide information about investments in the planning and construction of the plants, which is the first phase; after that each manufacturing or logistics company invests in equipment, etc, and this investment usually surpasses the one in the construction phase but its amount is usually not disclosed.

For example, if we take ABB, a large multinational corporation. They published information about their investment in Bulgaria, and were awarded as Investor of the Year for 2009. There investment was EUR 15 M; the employed persons were 350 at first, but this number is growing, and will probably reach 500 by mid 2011.

But we are talking about many companies here so it is hard to tell exactly because they keep expanding and developing the facilities and equipment, this is not a one-time thing. They start with a certain investment, and then add new assembly lines, etc., for example in the cases of the investments of William Hughes and ixetic.

As far as the number of jobs – about 1 100 people work in the Rakovski Industrial Zone; about 3 000 in the Maritsa Industrial Zone. But they are expanding. For example, ixetic have already used up their space, and are looking to expand; the same goes for William Hughes. So the number of jobs is growing even in this harsh economic environment at the moment.

Drawing upon your experience – what are the most important factors to make such a greenfield industrial investment successful?

There are usually two factors. One is a bigger framework, and then there is a smaller framework within the first one.

First, the respective country should be attractive enough. For quite a while now Bulgaria has been been most of requirements, and we checking most of the boxes for a number of reasons.

Bulgaria has favorable taxes, for the past 5 years Bulgaria's taxation policy has been extremely attractive. We enjoy cost effectiveness of labor, skilled or unskilled. We have relatively attractive prices of electricity, water, natural gas. Then, of course, the global aspects – good location, access to markets, transport infrastructure. These are the kinds of things that investors evaluate to determine whether to go for a certain investment.

Then, the smaller framework is that when the investors have selected Bulgaria, if they come to us, we are able to offer the finished solution for them and they only have to work with one single entity at one spot. They don't have to become familiarized and go through the entire administrative process in Bulgaria, which I can say is rather complicated for the construction of one industrial plant.

This is starting with the planning, the construction permits, the entire building process, the launching into operation – all that requires work with miscellaneous institutions and very good coordination in Bulgaria's administrative structure that foreign companies don't know.

So it is best for them to if somebody else can take up the burden of this process for them and they can focus on their original activity

Then, of course, in terms of requirements, we have the quick realization, competitive prices, and high quality of the facilities that we achieve. For some of the larger plants that we construct, our teams actually visit similar factories abroad to make sure we comply with the requirements.

I can safely say that their Bulgarian facilities are at the same or a better level than the plants in their home countries, and each one of these investors can confirm my words. That is, the level of engineering they get here fully meets their requirements for the end product.

So to sum it up, it is this finished product that attracts them most. A plot of land in itself, however, attractive it might be, is not enough, foreign investors need a functioning facility where they can start work. The other major thing is the time – especially for smaller and medium-sized companies. Not so much for a large corporation because those can often afford to wait.

Still another main factor is infrastructure – which has to meet EU standards – roads, water supply, power, gas supply, communal services, airports, ports, etc. But we take care of that in the preparation and planning phase when we design the respective industrial park. 

How would you characterize Bulgaria's potential in that respect?

If we look at the entire construction sector today – industrial, residential, office, commercial, vacation properties – the positive thing for us as a company is that we are focused on industrial construction and we hardly feel the effects of the crisis because this construction segment continues to develop. Dynamic new investors keep looking at Bulgaria, we get inquiries, we meet with them, we expand existing plans and welcome new companies. 

This whole activity is actually on the rise in Bulgaria at the moment. From what I have seen from the companies coming in as foreign investors, Bulgaria is actually a very beneficial location for them to reduce their expenditures and become more cost effective.

Here they have a lot more instruments that they can use to that end than in the countries where they come from because their costs there are fixed and pretty much the way for them to reduce them is by cutting the amount of human labor – which occupies a sizable share of their production costs.

In Bulgaria they are able to achieve the same results with much smaller operational costs. From that point of view, as those companies have shared with us, it has been a great advantage for those who had already made investments in Bulgaria before the crisis because they enjoyed having the alternative of a low-cost destination – because we are precisely a low-cost investment destination in terms of labor, infrastructure, energy. 

Given what you just mentioned – if we look at the model of industrial outsourcing in China and other destination countries around the world – how should Bulgaria compare to their model? What should the Bulgarian model of attracting industrial outsourcing look like with respect to industrial zone projects?

I think that at the moment Bulgaria has clear advantages. Right now the Bulgarian Economy Ministry and the Bulgarian Cabinet, together with the National Company "Industrial Zones" are investing enormous efforts to attract Chinese industrialists to Bulgaria.

Why is that and why is it possible and feasible? Because if we look at the developed industrial provinces of China, it is safe to say that Bulgaria has come close to them in terms of the cost levels generated here and there.

That is to say that in the developed Chinese provinces with contemporary industrial zones where they also have hi-tech products and research and development going on – the advantage they had with the immensely low cost of labor has started to disappear, and the labor production costs there and the same costs in Bulgaria have become generally similar.

That is precisely why more and more European companies who had outsourced their operations to China are now looking at places such as Bulgaria with a great interest because they would be able to achieve the same results here but at a location that is much closer to them, they will cut the transportation and logistics costs, and will be able to control the entire production and distribution process much more easily.

When you factor in the advantage of having an EU product, the different taxation policy, etc, I think Bulgaria has a lot to offer.

My argument is supported by what I already mentioned – that at present even Chinese investors and industrialists are considering Bulgaria as an investment destination in a very focused way – precisely because they stand chances of acquiring deepened access to European markets that way.

What makes this harder to happen is that it is much easier for an EU company to outsource in Bulgaria than for a Chinese company. About a year ago we had a large Chinese business delegation – 250 senior industrialists and heads of manufacturing operations in Chinese industrial companies – that we took to the Rakovski Industrial Zone to show them how it is working out over there. They managed to get a flavor of what they can achieve in Bulgaria.

Now, as far as the construction of facilities and outsourcing or just expanding production operations are concerned – that would not be hard at all.

The bulk of the work, however, has to be done on intergovernmental level. For all this to happen, there must the approval of a lot of people and institutions. One, two, three Chinese companies won't relocate their operations to Bulgaria – this whole thing needs to be part of a much larger framework and an official policy.

That is why we have a lot of work here. A company like ours could not do it alone, and that is why we have joined efforts with the state and its institutions, and we hope this will yield results. Because the Chinese are clearly interested in the Balkan region, not just Bulgaria, and the growth that they have had provides them with the resources to look at such investment destinations that can integrate them into the European market in a such an elegant way. 

So do you think that Bulgaria can benefit by grabbing a share of Chinese outsourcing as part of a trend in which China would start outsourcing itself?

I think that this will certainly happen, it is a matter of time, and I hope many Chinese companies will select Bulgaria as an investment destination. The only question is what locations the Chinese will pick in Europe because they have the economic power to expand and the time seems right for such moves.

The Bulgarian state has been very active in that respect, several agreements of cooperation and partnership have been signed with Chinese institutions. There has been no end result yet but a lot has been done, and there is much progress in that direction. 

How do you view the concept and potential for the work of National Company "Industrial Zones"? For example, the former government had a plan for the company to create and manage 100 industrial zones; now this has been modified to several major zones around the country.

I think that the current model is much more realistic compared with the initial plan with the 100 zones. Bulgaria has a sufficiently small population to have plans of such scale. Plus, one has to emphasize that it is not the large number that matters. Several well developed industrial zone projects are enough, and will do the job rather than dotting the entire landscape with them. Of course, it will be nice to have industries to sustain every small Bulgarian town and to provide employment but it is unlikely because having a great desire for that kind of things is not sufficient as a factor.

At present, the National Company is investing enormous efforts to develop such industrial zone projects including as municipal and state projects. Our industrial zones are 100% private; the National Company is 100% state-owned. I can point to the Ruse Municipality, which has managed to set up a 100% municipality-owned industrial zone, on its own, where the municipality was the developer.

Our experience and research of what has been observed in most newer EU member states is that when those countries became destinations for outsourcing, the largest number of industrial projects there were based upon public-private partnerships (PPPs) – for example, a municipality plus a private developer.

There is a reason for that – because the municipality can provide the land, perhaps the infrastructure, and help out with the administrative process but the role of the private entrepreneur who can plan and organize supplies and construction of an industrial facility quickly and efficiently is inevitable. As I said, just the land and the infrastructure are not of such a great value to the investor, the investors prefer the finished product.

What I see as the obstacle in projects realized solely by a municipality is that flexibility there is limited while there is little time – because each decision has to be made by a municipal council – or in some cases the Council of Ministers, etc. What is more, this segment is highly competitive so when an investor shows up, the central or local authorities have to be very careful with respect to providing preferential treatment because there is the competition protection legislation restricting the state authorities.

All these things make it complicated for state or local authorities to complete industrial zones. There are certainly tools to alleviate that but I am not sure that the state has the desire to deal the same way a private company would with all the tiny details and all the things I mentioned – the entire process from 0% to 100%.

I cannot imagine the state planning and building on its own; this pretty much requires private enterprise.

What would you say about the question of where to locate industrial zones? Because those can be clearly a powerful tool for lifting entire regions out of economic hardship; there have many critics in Bulgaria of locating such zones in bigger cities. The Bozhurishte Industrial Zone is in Sofia, while the zones that you manage are technically in smaller towns.

I will tell you what our strategy was when we picked the locations for these industrial zones. The decisions were based on several factors. First of all, the fact that the city of Plovdiv is a traditional industrial city and destination. It has the universities and the labor resources, and this provides comfort for the investors because this is a key factor. Generally, these industrial zones can draw workers from a radius of 50 km, a pool of some 750 000-800 000 people. The very proximity of the city of 350 000 plus the population of the smaller towns around – the Rakovski Municipality has some 30 000 people – provide sufficient labor resources.

When we started the Rakovski Industrial Zone, the unemployment rate there was 27%, some 3000 people were registered as unemployed. Now that number is down to 1 200. Actually, the municipality manages to provide almost all workers for the industrial zones. Engineers and specialists are easily found in Plovdiv.

It is important to have the industrial zones in smaller towns because – other than the hi-tech industries – the manufacturing generally requires a larger number of workers, and if the plant is located in Sofia or Plovdiv, the labor costs will be higher because the standard of living there is higher.

For example, when ABB were considering the location for their Bulgarian plant, Plovdiv was the most attractive place for them because of the diversity of the human resources in the region. Their investment would not have worked out the way it did in terms of costs if they had to hire 500 people in Sofia. There is a difference in the living standards.

Is there a difference between Northern and Southern Bulgaria with respect to their potential for industrial zones?

Our company also has one project in Northern Bulgaria, in the Letnitsa Municipality. The difference with the Plovdiv region in Southern Bulgaria is that the region has managed to preserve its vitality, there is no outflow of people, even from the smaller municipalities.

For example, we checked that before we started the Rakovski Industrial Zone, there was no exodus of people leaving for abroad or for Sofia or Plovdiv. Before the industrial zone, the local people did work in Plovdiv but hadn't left the town.

Our observations are that the situation in Northern Bulgaria are not exactly the same. There have been great ideas for projects there but I am not sure that there are enough people there left for them.

What are Bulgaria's potential disadvantages for industrial zones development? Is there a shortage of skilled or unskilled laborers?

The impressions that we have from our investors is that there is no shortage for the time being in terms of the number of laborers. There are enough people for that.

The quality of the skilled labor is a totally different problem. What the investors have witnessed is that there was a moment of severing the tradition in the training of industrial specialists. There was a period not so long ago when industry in Bulgaria was slack. The consequences of that are not very good.

When a foreign company comes here and looks for engineering specialists people here usually have to undergo some kind of training, either in Bulgaria, or in the company's factories abroad. Because it seems that university training in Bulgaria does not provide exactly what they are looking for, and that refers to all levels.

On the flip side, what investors say is that apparently the mentality and approach of the Bulgarians are flexible enough and they are quick learners because the companies manage to build up very quickly the specialists they need, and after that they are extremely happy with their work.

In 1-2 years, they say they have assembled great teams here, and that their new Bulgarian staff are doing as good as people with years of experience in their home countries' factories.

This leads to something very positive – there are no people leaving them. The Bulgarians working for such a company become narrow specialists, they are not universal, and so there is a good combination.

As far as infrastructure is concerned, our company always invested a lot in infrastructure. This is the difference between Bulgaria and other European countries where with EU funds and methodology they managed to complete modern infrastructure.

For some reason the method of public-private partnerships did not work out properly in Bulgaria. It exists, and we have great partnerships with the municipalities where our projects are located but that is on the level of general support. We never managed to get EU funding for such a project as a PPP.

For example, there was a PHARE Program for which many municipalities got excited. But Bulgarian municipalities do not have proper resources. They can provide plots but planning, detailing organizational plans, changing the status of the land, fashioning the infrastructure, and forming an industrial zone on time to get EU funding – this can hardly happen.

First, the municipalities don't have that kind of specialists and teams, second, they lack the money. That is why PPPs are beneficial because the private investor can provide flexibility, and the end product would benefit both the municipality and the private investors.

But in Bulgaria so far the projects have been either 100% state-owned or 100% private. We could have achieved better results but I think that what we have achieved so far is not little. 

It will be great to develop further the industrial sector because the crisis showed that countries with developed industries have been doing better.

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