Welcome to the Future: Bulgaria's Industrial Zones - and Why China Is Interested in Them

Novinite Insider » SPECIAL REPORT | Author: Ivan Dikov |November 22, 2010, Monday // 18:22| Views: | Comments: 0
Bulgaria: Welcome to the Future: Bulgaria's Industrial Zones - and Why China Is Interested in Them Chinese investors and authorities have shown interest in the future Bozhurishte industrial zone northwest of Sofia (the town of Bozhurishte is in the upper left corner). Map by Google Maps

In June 2010, the Bulgarian government broke the news that it formally invited Chinese authorities and companies to set up and manage a joint industrial zone in Bozhurishte, right outside of Sofia, a development that can well be seen as revolutionary.

The first ever industrial factory in the Ottoman Empire, a state spanning some 18 million square km, was opened in 1833 in Sliven by the Bulgarian entrepreneur Dobri Zhelyazkov. Yet, in spite of that and other industrial sparks in Bulgaria, especially after its National Liberation in 1878, up until the 1950s, it remained a primarily agrarian society with little heavy industry. (In 1891, when the international proletarian movement set foot in Bulgaria, the country had only 3 000 industrial workers in total.)

The Bulgarian heavy industry created by the communist regime (1944/48-1989), which was grossly inefficient and tied with the Soviet and COMECON economies, was largely wiped out in the 1990s by mismanagement, low competitiveness, loss of markets, suspicious privatization deals, lack of investment, to name but a few.

As the worst passed (the Bulgarian crisis of the mid and late 1990s), and Bulgaria has already been integrated to a certain extent with the EU, the authorities and private companies today stand a fair chance of taking advantage of the processes of the global economy by attracting greater FDI. The so called industrial zones – designed to fit both outsourcing and expansion of multinational corporations – appear to be a very attractive way to do that.

These prospects don't seem to have been hurt substantially by the global economic crisis of 2008-2009 – as the global quest for cost-effective labor and production continues – and as the People's Republic of China, the world's primary outsourcing destination of the past decades, is on the verge of becoming a global "outsourcer" itself.

What is more, over the past couple of years, the governments of both Borisov and Stanishev in Bulgaria started to recognize and emphasize the need to create a real export-oriented economy and to generate export-driven economic growth.

The Concept of Industrial Zones in Bulgaria

In the recent years many in Bulgaria started to hope that industrial zones – areas planned for industrial development, logistics, and, in more specific cases, office and business parks – would be the key to the country's economic takeoff.

As the Bulgarian state finances and economy stabilized after the 1990s collapse thanks to the currency board, the eventual completion, more or less, of the structural reforms, the gaining of NATO and EU membership, and the introduction of sinfully (in the good sense) low taxes, hopes have been that Bulgaria's crucial geographic location and its still skilled labor force would drive in more and more foreign investors.

These hopes might have been overstated, with every single small town mayor deciding to set aside a municipal plot and wait for investors to show up. In 2008, the Socialist-led Stanishev government announced a rather interesting plan to set up 100 industrial zones around the country, turning Bulgaria into a largely export-driven economy by 2018. Top government officials have been talking about how Bulgaria offers outsourcing conditions competitive to those of Chindia.

While all that did not really translate into extremely impressive industrial investments in Bulgaria in the past couple of years – largely because of the global economic crisis – it did lead many to realize and state the potential of export-oriented industries.

With the global crisis now winding down and a new set of institutional endeavors, Bulgaria might finally have found the right track for its development of industrial zones. A "National Company Industrial Zones" (NCIZ) was set up in early 2009 to work closely with the Ministry of Economy, Energy, and Transport, and the InvestBulgaria Agency, all of those including a number of technocrats and professionals with education and management experience from Western countries and companies.

In the meantime, a couple of municipalities managed to create functioning zones with state help, while several private industrial zone projects have also developed successfully.

The big question in 2010-2011 is – can Bulgaria create more such pockets of industrial development and expand the existing ones in order to bring in FDI, spur greater GDP growth and exports, and finally start advancing along the lines of hi-tech, innovation, and research and development.

"National Company Industrial Zones" was established in the spring of 2009 with the goal of facilitating the inflow of FDI in the country by offering industrial terrains to foreign firms. Our priorities also include the creation of an innovation and a high-technology center, and this is a solid way to increase the competitiveness of the Bulgarian economy in general. I personally think all industrial terrains are important – they can serve different manufacturing firm requirements in different times. In view of this, if a foreign firm contacts us, through our close work with the Ministry of the Economy, Energy and Tourism, and the InvestBulgaria Agency, we can channel them to locations that are most attractive for them," Kiril Nikolov, CEO of the NCIZ, told Novinite.com (Sofia News Agency) in an interview.

After 2008, the Bulgarian governments and the National Company have decided to modify the initial plan for 100 industrial zones, and to go for the creation of eight major industrial zones around the country and a hi-tech park.

"I think that the current model is much more realistic... Several well developed industrial zone projects are enough, and will do the job rather than dotting the entire landscape with them. At present, the National Company is investing enormous efforts to develop such industrial zone projects including as municipal and state projects," commented in an interview for Novinite.com (Sofia News Agency) Nikolay Brankov, Managing Director of Industrial Developments at SIENIT Holding, a Bulgarian construction company that started five private industrial parks in the past decade.

"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," Brankov explains.

The Ruse Free Zone, a successful industrial development project, 100%-owned by the Ruse Municipality. The so called Danube Bridge linking Bulgaria and Romania is in the background. Photo by freezone-rousse.bg

Where Are We at? Bulgaria's Existing Industrial Zones

The plans of the state company provide for developing industrial zones at several major locations around Bulgaria at the junctions of key transport corridors, close to ports, airports, and industrial and city centers.

Three of those eight zones are considered to be already completed: Free Zone Ruse (37 hectares in area), located at Bulgaria's main Danube port, with French manufacturer Montupet a major investor with a car parts factory. Free Zone Vidin (30.8 ha), located at another Danube Port, and Free Zone Svilengrad (7 ha), close to key crossings on the borders with Turkey and Greece, have also been developed.

The future and "in progress" projects include industrial zones at Burgas (27 ha) and Varna West (109 ha), both at Bulgaria's major Black Sea ports and large cities; and Karlovo (58 ha) and Telish/Pleven West (200 ha), close to major inland industrial centers.

The jewel in Bulgaria's industrial crown, however, is expected to become the future industrial zone in Bozhurishte, right outside of Sofia, with an area of 191.4 ha, which is to be managed jointly with the Chinese Province of Zhejiang, and is to attract major Chinese companies wishing to invest and trade in Europe.

The Maritsa Industrial and Commercial Zone, a project of SIENIT Holding and KCM SA, located right outside of Plovdiv. Photo by SIENIT Holding

Several private-driven industrial zones have sprung up in Southern Bulgaria, all located around Plovdiv, a major industrial center. These have been constructed by SIENIT Holding, in partnership with other private entities, and with the support of local and state authorities.

Among those, the Maritsa Industrial and Commercial Zone is the largest (300 ha); it is right outside of Plovdiv and employs about 3000 people. Major investors there include Liebherr, Schneider Electric, Linde, Balkan Star, Industrial Commerce, Socotab, Ferrero, among others.

Then there is the Rakovski Industrial Zone (85), a major success story for a municipality of 30 000, declared in 2005 to be "The Most Successful Industrial Zone in Bulgaria" and awarded as a model for public-private partnership. It provides jobs for about 1100 people, with major investors including William Hughes, Kaufland, inexic, ABB. For its EUR 15 M investment in an electric systems plant there (to employ 500 by 2011), ABB grabbed one of Bulgaria's "Investor of the Year" awards in 2009.

The other projects of SIENIT, still under development, include the Kuklen Industrial and Commercial Zone (70 ha), Parvomai Industrial Zone (100 ha), and the Letnitsa Industrial Park (54 ha), which is the company's only project in Northern Bulgaria.

The Rakovski Industrial Zone, in the Rakovski Municipality near Plovdiv, a project of SIENIT Holding, widely seen as a major success story in greenfield industrial developments in Bulgaria. Photo by SIENIT Holding

Checking the Boxes: Bulgaria's Advantages

What are the advantages that Bulgaria can count on in its bid to attract investors and outsourcing not just from Europe but also from China, the United States and all around the world? And how "self-fulfilling" are these advantages? Are they enough for successful industrial zones development on a large-scale – and for attracting the future "reversed outsourcing" to come from China and other destinations?

Every single brochure you pick up advertising Bulgaria as an investment destination will tell you of the country's great location in Southeastern Europe, on five major European transport corridors (No. 4, 7, 8, 9, and 10), which in themselves are trans-continental Eurasian highways.

The "why invest here" list includes also the well-educated and highly-skilled labor force, EU and NATO membership, macroeconomic and fiscal stability of the state, low level of public debt, free trade agreements and access to major markets - EU, USA, Russia, Turkey, the Mediterranean, ASEAN.

Add to that some of Europe's most competitive operational costs, 10% corporate (0% in areas with high unemployment) and income tax, and other details of preferential treatment for foreign investors. Does that automatically add up to grand foreign investments in industries and manufacturing?

It appears that for Bulgaria, for the time being, the whole has been smaller than the sum of its parts as far as foreign industrial investments are concerned. While Bulgaria saw staggering growth of foreign investments in the years prior to the 2008-2009 world economic and financial crisis – the record EUR 9 B in 2007, followed by EUR 6 B in 2008 – most of those were in financial services and banking, construction, real estate, and tourism, with some major investments in IT and services outsourcing such as call and customer support centers.

As the foreign investments in real estate and banking generally vanished because of the crisis, some recent data does bode well for Bulgaria's industry: in the first quarter of 2010, Bulgaria registered a 412% growth year-on-year, or a total of EUR 513 M, of foreign direct investments in the non-financial sectors.

For the time being, however, most foreign investors in Bulgarian industry have been from Europe and, to a lesser extent, from North America.

"Many Chinese firms with international operations are looking for the most cost effective approaches to further expand their businesses. Bulgaria offers quite a few advantages – taxation benefits, educated labor force, a gateway to the EU, crossroads of several trans-European transportation corridors, etc. So, I hope will Bulgaria become a desirable investment destination for Chinese firms in that aspect... Taxation is very important. Bulgaria offers one of the lowest corporate taxes in Europe. Our Investment Encouragement Act, which was amended recently, further can provide tangible tax benefits to foreign firms willing to invest in the country. The Act allows for R&D write-offs, exemptions on payment of corporate taxes, and other benefits, and it is a great mechanism to stimulate enterprises that enter Bulgaria," NCIZ CEO Nikolov explains.

By all accounts from government officials and business experts and analysts alike, the Bulgarian "National Company Industrial Zones" has started to invest enormous efforts into helping Bulgaria finally start utilizing on those prerequisites.

"Bulgaria has been meeting most of the requirements, and we are checking most of the investors' 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," says in turn Nikolay Brankov from SIENIT.

Brankov, however, points out that the ability to offer the investors the finished product is what really matters when it comes to a decision on whether to locate their production in Bulgaria.

"Our idea as a developer has been 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. They don't have to deal with anything else other than their original activity, which is manufacturing or logistics. 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. It is this finished product that attracts them the 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," he elaborates.

Does Bulgaria Really Have Disadvantages?

What has been holding back Bulgaria in its efforts to attract more FDI? First of all, one needs to point out that, as mentioned above, in the pre-crisis years FDI had started to pour into Bulgaria at a rate unseen before in its history.

The list of "negative prerequisites" as far as manufacturing is concerned includes things like Bulgaria's lack of substantial mineral and energy resources, its tiny domestic market, general concerns about the rule of law and corruption (areas in which Bulgaria is believed to be making steady progress).

The more problematic areas probably have to do with the Bulgarian bureaucracy, and the underdeveloped capacity of the local, and sometimes the central authorities to provide fast solutions to foreign investors, at least up until now. Brankov has indicated that the model of public-private partnerships, which can be a major factor for economic and industrial development, has generally failed to yield substantial positive results in Bulgaria, largely because of the lack of capacity on part of the municipalities.

He has pointed out that on the local level the best option for industrial zones and similar projects would be for municipalities and private Bulgarian enterprises to partner in order to attract foreign companies. He has recognized, however, that, on a larger level, as in the case of the future Bozhurishte Industrial Zone and the prospects of working with the Chinese, the role of the government is the major factor because of the intergovernmental nature of the respective project.

One has to bear in mind that institutions such as the Economy Ministry and especially the InvestBulgaria Agency, which has been around for a while, have received rather positive feedback from investors.

Could labor – both skilled and unskilled - be an issue for anybody seeking to invest in Bulgaria? That hardly seems to be the case today even though, as the Bulgarian economy was booming before 2008, a favorite media topic was the imagined need to "import" unskilled laborers from countries such as Vietnam, or engineers from Ukraine or Belarus. Both Nikolov and Brankov are convinced that both skilled and unskilled labor is abundant in Bulgaria at present.

"I don't think there will be a shortage of labor, maybe a steeper learning curve for some. After all, we live in a market economy where the labor mobility is determined by the requirements of the businesses, and the willingness and the capabilities of people to satisfy them," Nikolov says

The one issue that Bulgaria does need to do much work on is its transport infrastructure. For one thing, Bulgaria's railway lines have seen little investment in the recent years in order improve their speed and energy efficiency. The capacity of the Danube river and sea ports could well be expanded – back in 2007 the head of Port Varna Danail Papazov alarmed that the port was close to the point of being unable to handle the enormous volumes of booming trade. Bulgaria's airports appear to harbor much potential, and substantial progress has finally started to be made on highway construction in the past year. Development of transport will be crucial if Bulgaria really – and finally – wants to takes advantage of its geographic location In general, it is safe to say that as far as Bulgaria's transport infrastructure is concerned – the best is yet to come.

"Bulgaria for its part has to create a climate for foreign investment. One aspect of that is the rule of law. Companies need to know that their investments are protected. There also need to be incentives. There is a competition in Europe, especially in Central and Eastern Europe. Believe me, Romania, Hungary, Serbia are trying to attract many of the same investors. The government of Bulgaria needs to make some strategic decisions... In Bucharest and Belgrade, they too would like to have investments come," US Ambassador to Bulgaria James Warlick told Novinite.com (Sofia News Agency) in an interview.

Bulgaria's Minister of Economy, Energy, and Tourism Traicho Traikov (left) with Chen Deming, Minister of Commerce of the People's Republic of China, in Beijing in June 2010, when the Bulgarian government invited China's provice Zhejiang and Chinese companies to invest in the Bozhurishte Industrial Zone. Photo by BGNES

Outsourcing Reversed: When Will the Chinese Investors Arrive in Bulgaria?

According to Kiril Nikolov, the Bulgarian government and the National Company are currently "refining a Master Plan for the establishment of the industrial zone" at Bozhurishte.

The Bulgarian authorities expect to work on Bozhurishte with partners from China in two major ways: first, creating and managing a joint venture for the industrial zone with China's Zhejiang Province; the venture will operate a portion of the total plot in Bozhurishte and will offer industrial zone conditions to interested manufacturing firms from China and the world in general; second, apart from the joint Bulgarian-Chinese park, Bulgaria will develop additional capabilities on the Bozhurishte plot, and will invite Chinese companies to become residents there.

Nikolov has explained that senior officials from China and Zhejiang visited Bulgaria several times and made it clear they preferred Sofia as a location for the joint industrial zone – because of its transport location and human resources.

"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," commented Brankov in his capacity as the manager of several industrial zones.

He points out, however, that at present it is still easier for an European company to outsource to Bulgaria than for a Chinese company to do so because of the intergovernmental regulations.

"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," he believes.

Major Chinese investments in Bulgaria have so far been isolated cases, though rather important ones - a car manufacturing plant of Great Wall Motors near Lovech that opened doors recently, the glass factor in Razgrad of China Luoyang Float Glass Group, and a solar park in Ihtiman by Polar Photovoltaics, among others.

The last 6-8 months, however, have seen a greatly intensified dialogue between the governments of Bulgaria and the People's Republic of China, in which the Bozhurishte Industrial Zone near Sofia is a major topic but is not the only one.

Economy Minister Traikov has made it clear that Bulgaria is looking forward to Chinese concessions of Bulgarian ports and airports, and Transport Minister Tsvetkov went to Beijing to get an invitation for joining a project of China and Turkey for a high-speed "Asia-Europe" rail.

If the Bozhurishte Industrial Zone works out fine – and chances are that it will – this could be a major breakthrough in Bulgarian-Chinese economic and trade relations, with a significant spillover effect to other projects and other fields.

The general plan of the future Bulgarian-Chinese industrial zone at Bozhurishte near Sofia, which is to host Bulgaria's first hi-tech park. Map by National Company Industrial Zones

What Are We Really Getting At: Bulgaria's First Hi-Tech Park

The Bozhurishte Industrial Zone will be very important not just because it will be huge, it will be near Sofia and will create many jobs, and it could be a crucial Bulgarian-Chinese project. There is more to it – the efforts of the "National Company Industrial Zones" to create a high-technology park there, which will be the first of its kind in Bulgaria.

"The park is meant to be developed on a portion of the terrain in Bozhurishte. It will consist of a high-technology park, a business incubator and the inherent technology transfer office. The park itself will serve as a base for R&D work coming from outside firms, from research teams, or from universities. We would like this to be an in-sourced facility for pure R&D, containing labs, testing centers, and experimenting units. The incubator will provide conditions to newly formed innovative firms by supporting them in various functional aspects of their business – marketing, finance, legal, business planning, etc., while leaving the pure R&D work to the firms themselves," Kiril Nikolov explains, underscoring the significance of this project, which, if successful, could make a major impact on the development of the Bulgarian economy.

"This model works very successfully all over the developed world, and it is a base for making practical use of advanced science. Currently, we are working with several potential partners what we would like to become part of the project. We are moving very seriously ahead with this initiative," he says.

He and other senior Bulgarian officials have generally been cautious in announcing details about the development of the state-sponsored industrial zone projects, preferring to set the conditions right in order to attract investors from China, Europe, the United States, and around the world.

With the new dynamics and trends emerging in the work of the Bulgarian government and the economy finally starting to emphasize the export-oriented industries, Bulgaria appears to have high-hopes for the future of its industrial development. It should become clear in a couple of years or even months what the cautious optimism of the Bulgarian statement officials indicates.

 

The interview of NCIZ CEO Kiril Nikolov for Novinite.com (Sofia News Agency) READ HERE

The interview of SIENIT Holding Industrial Developments Manager Nikolay Brankov for Novinite.com (Sofia News Agency) READ HERE

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Tags: Bozhurishte, Bozhurishte Industrial Zone, Kiril Nikolov, National Company "Industrial Zones", China, Nikolay Brankov, Sienit Holding
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