InvestBulgaria Agency Director Borislav Stefanov: Foreign Investors' Interest in Bulgaria Growing Regardless of FDI Statistics

Novinite Insider » INTERVIEW | Author: Ivan Dikov |October 12, 2011, Wednesday // 04:01
Bulgaria: InvestBulgaria Agency Director Borislav Stefanov: Foreign Investors' Interest in Bulgaria Growing Regardless of FDI Statistics

Exclusive interview of (Sofia News Agency) with Mr. Borislav Stefanov, Executive Director of the InvestBulgaria Agency.

This interview is a follow-up of's interview with Stefanov shortly after he was appoitned in charge of the InvestBulgaria Agency in 2010.

Borislav Stefanov was formally appointed Executive Director of the InvestBulgaria Agency, a government body facilitating relations with foreign investors, on May 24, 2010.

Stefanov graduated with a BA in business administration from the American University in Bulgaria, a Masters in international management from Regent’s Business School in London, and a MBA from Harvard Business School.

He has worked at the Moscow office of the Boston Consulting Group (2007-2009), where he participated in projects in Serbia, Poland, India, and Russia.

In 2003-2005, he worked at DaimlerChrysler in Dubai. He has also been a sales and development director at Lada Image, a subsidiary of the Russian company Avtogaz.

On December 17, 2009, Stefanov was appointed the Deputy Director of the InvestBulgaria Agency.


Data of the Bulgarian National Bank registered negative FDI flow in Bulgaria in the first half of 2011, which created the impression that Bulgaria’s foreign investments have collapsed. Why do you think that is? What is your reaction?

This conclusion seems to be mostly the result of the fact that very often economic analyses in Bulgaria boil down to looking at the balance of payments in the latest press release of the Bulgarian National Bank, and starting to interpret this figure without analyzing what is behind it.

In the past year and a half, I've heard many such interpretations and I am starting to be more skeptical towards the quality of economic analysis in Bulgaria.

I don’t suggest that the FDI data is incorrect. The Bulgarian National Bank calculates the payment balance as it should but the fact of the matter is that the figure of foreign direct investment (FDI) derived from the balance of payments doesn’t actually reflect the FDI.

It shows what funds go in and out of the accounts of companies with foreign shareholders. These funds aren’t always investments, which is why sometimes this figure could make FDI seem higher, or sometimes - lower but in most cases it doesn’t show with precision the amounts invested.

The major reason for that is the methodology, which is not a Bulgarian invention but an invention of the International Monetary Fund and is used by all countries in the world. Because when you work with tens or hundreds of thousands of companies you have no way of asking them if they are going to spend their incoming transactions on buying equipment, building a factory, paying salaries, etc.

In principle, the methodology used by the National Statistical Institute to calculate FDI by counting only the long-term assets is probably more precise – but in that case there is no way to account for investments in new jobs, which is important, too.

So the fact of the matter is that there is no single precise way to indicate for sure the amount of the investments, no matter whether they come from Bulgarian or foreign companies.  

One problem with the FDI data from the BNB is that the methodology assumes that all transactions received by a Bulgaria-registered company with large foreign participation are investments. The threshold for foreign-owned shares is 10%. This means that every company in Bulgaria with at least 10% of foreign ownerships is believed to have a sufficiently high foreign share so that when it receives money from the parent company or companies related to it from abroad, this is counted as FDI, and not as a portfolio transaction or some other kind of item of the balance of payments. 

The problem with this methodology of the IMF is that when a company decides to build a new office or a new factory and loans the money from a local bank, for example, this isn’t counted as FDI because the funds didn’t come from the parent company. The reverse is true as well – if a company receives money from its parent company and spends it on advertising, for example, this probably doesn’t meet the proper criteria for FDI but will be counted as FDI by the statistical service.

Still another issue is that the 10% threshold of foreign participation is misleading when it comes to the source country said to be the investor. We know that Bulgaria has a lot of investments from the Netherlands or from a number of islands when it’s clear that the respective company is not really from the Cayman Islands but this is where the transactions come from. So many of these foreign direct investments aren’t foreign at all, while other actually foreign investments are omitted.

Bulgaria's FDI in 2004-2010. Source: InvestBulgaria Agency/BNB

What would be a more accurate figure of the FDI in Bulgaria, if we leave methodology aside?

Let’s first mention that, for example, this year the amount of FDI appears so low because the Bulgarian subsidiaries of several large foreign companies returned large loans to their parent companies that they got over the past few years.

What happened from the start of 2011 until last month is that three firms returned about EUR 700 M that they had received in the previous years. This in itself is counted as an outflow of FDI, i.e. a decrease of foreign investments.

The funny thing in this case is that the largest of these loans, which amounts to almost EUR 300 M, was repaid by a company, which is one of the largest foreign investors in Bulgaria.

Earlier this year the company in question announced a new investment project in Bulgaria. It hasn’t laid off a single person, it hasn’t shut any factors, it hasn’t returned any equipment but the fact that they repaid this loan is counted as an outflow of EUR 300 M, i.e. a negative investment.

When a person sees an outflow of FDI of EUR 300 M to Germany in the statistical data, it is easy to think that some German company shut down its operations in Bulgaria and left the country, which is not the case at all.

Another foreign firm in question repaid about EUR 200 M in a loan payment. It was a subcontractor for a large infrastructure project in Bulgaria in the recent years, and now that the project has been completed it repaid a substantial sum to its parent company in the Netherlands.

The funny thing is that the parent company in the Netherlands deals with machine-building. In Bulgaria, its subsidiary did not work in the field of machine-building but was an infrastructure subcontractor. However, when the loan funding came into Bulgaria in 2008-2009, it was counted as an investment in the machine-building sector, while now, in terms of statistics, we have an outflow of investment from the machine-building sector to the Netherlands.

So this is the main reason Bulgaria’s FDI appear to be so law when it comes to statistical data.

What is the situation if the loan repayments that you mentioned are disregarded?

When we disregard these three large loans that were repaid, Bulgaria’s FDI in 2011 doesn’t differ substantially from the foreign direct investment it got in 2010 or 2009; it just seems worse because of these statistics.

It is absolutely normal to repay inter-company loans after a period of crisis. The new thing, however, is that this had not really happened in Bulgaria earlier. In the past few years, the largest inter-company loan repayment amounts hardly ever exceeded EUR 100 M. In most cases, if any such loans were repaid, these amounts were about EUR 20-30 M.

What is more, in the years prior to 2008, almost all Bulgarian subsidiaries operating in Bulgaria had a positive loan balance.

But, as I said, this trend has already materialized in other countries. For example, in 2009, the Czech Republic, which usually has about EUR 6-7 B of FDI annually, got only EUR 2 B of FDI, according to statistical data. The next year the FDI reached EUR 6 B again.

One of the reasons for this “decline” was that the foreign companies based in the Czech Republic repaid their loans – just as in they now do in Bulgaria; they were funded primarily through inter-company loans which were counted as FDI when the firms borrowed the money, and as negative FDI when they repaid the loans.

Slovakia is also a very good example in hand. For the past two years, Slovakia has technically had negative FDI, while it is actually a country with very serious foreign investments. But meanwhile, many of these companies started to repay loans to their parent companies, mostly in Germany.

What we are observing in Bulgaria in terms of FDI data is no different from these trends. What is more, it doesn’t indicate any serious problem with the Bulgarian economy – to the contrary.

When we spoke with the financial director of one of these three firms that repaid inter-company loans in the recent months, he said, “The negative interpretation is very weird, because the fact that we repaid a EUR 300 M loan shows that we are capable of doing that without any effect on our operations in Bulgaria.”

So these repayments of intercompany lending signify a good financial situation rather than a problem with the Bulgarian economy. However, for statistical purposes, they are counted as FDI outflow.

And, yet, even this statistical data already indicates that Bulgaria achieved a positive “FDI” after the first half of 2011. Is it possible to speak of a positive trend of FDI in Bulgaria already?

A trend would have to be based on the methodology of the Bulgarian National Bank, which divides FDI into two large groups. The first group includes investments in finance, trade, and real estate, which in 2005-2008 formed the overwhelming amount of foreign investment in Bulgaria.

The second group includes all other sectors – manufacturing/industry, energy, and telecommunications, which in Bulgaria saw a boom because of the mobile phone operators, the privatization of the Bulgarian Telecommunications Company, and the cable TV operators.

Basically, foreign investments in the sectors from the second group in Bulgaria are relatively constant. Since 2000, they have attracted about EUR 1-1.5 B per year. There were some exceptions – for example in 2007-2008, when these sectors attracted about EUR 2 B annually. But as a whole these sums are rather constant.

In this respect, 2010 was no exception – we had about EUR 900 M of FDI invested solely in industry, while the investments in all sectors except for finance, trade, and real estate amounted to about EUR 1.3 B, out of a total FDI of EUR 1.64 B at the end of 2010.

It’s important to note that when Bulgaria’s economy attracted the most impressive amounts of FDI in the recent years, these amounts were impressive primarily because of the large investments in finance, trade, and real estate. The foreign investments in the other sectors are relatively constant, and will most likely remain constant in 2011 as well.

The fact that we are already starting to see a positive FDI balance – after the repayment of inter-company loans in the first half of the year – comes to suggest that we aren’t witnessing a great difference in the foreign investments since last year.

It is harder to predict what will happen from here on in the fields of finance, trade, and real estate, even when taking into account that the sums there going in and out of the country are a lot more substantial.

On the other hand, these are also the sectors that don’t really depend on the situation in Bulgaria, i.e. when it is easy to raise capital on the financial markets, investments in more speculative sectors such as real estate are greater. Respectively, if it’s harder to raise capital, investors play it safe, and focus on industry and manufacturing.

So what will happen in these sectors depends more on the global markets, not on us. Apparently, what’s going on the global markets isn’t very good right now, so we will hardly have big investments in finance, trade, and real estate. But, frankly, these aren’t the sectors that we are targeting simply because it is a lot harder to influence them.

I think that as a government, it is essential for us to focus on trying to increase the inflow of investments in sectors that are more sustainable and are not so dependent on crises and financial markets.

Which sectors do you mean in particular?

These are sectors having to do with manufacturing that have strong traditions in Bulgaria – electronics, electrical engineering, machine-building, chemical industry, pharmaceuticals.

Transport and logistics are also sectors where Bulgaria has the potential to become a hub for the EU.

Of course, almost every state in Central and Eastern Europe is trying to position itself as a hub - for example for Asian goods coming into Europe. Hungary has probably achieved the greatest success here – it is the fourth largest entry point for air cargo into the EU. Of course, it is hard to compete with ports such as Rotterdam and Hamburg but air transport is also very important, and for China it forms an enormous share in its exports.

Since you mention China – are Bulgaria’s hopes for Chinese investments starting to materialize?

It is good to mention China and Asia as a whole – because, first of all, in the recent years, China has emerged as one of the largest sources of foreign investments. I.e. China invests about USD 50 B annually in other countries.

Of course, the nature of the investments is a bit different – China still invests massively in land and resources, and a very small part of the Chinese investments abroad are in manufacturing, especially when it comes to developed markets such as the EU and the USA.

But we should keep into account that China’s production costs are growing, and it is no longer the FDI destination where everybody would go because it is very cheap to produce goods there and to ship them back to Europe.

The moment is near when even for the Chinese companies themselves it will be cheaper to produce certain goods where the production costs are nominally higher but the other expenses are lower, instead of producing the goods in China and shipping them across the globe. Very soon there will parity in production costs in China and other markets, which will lead to increased interest in Chinese investments abroad in manufacturing.

So here Bulgaria’s major problem is probably the marketing...

There has been much talk about Bulgaria as an outsourcing destination. Is Bulgaria already emerging as an outsourcing destination for global exporters targeting the EU market – such as the Chinese?

I think it is still too early to identify such a trend. It is just that Bulgaria’s investments from non-EU countries are very small. Probably 90% of Bulgaria’s FDI come from the EU. Investments from the USA and Russia make up almost all of the rest.

By the end of 2010, East Asian countries combined – China, Japan, South Korea, etc, had invested about EUR 200 M in Bulgaria, which is 0.5% out of a total of EUR 40 B of FDI in the past 20 years.

On the other hand, let me stress that what we actually need is one or two good examples. As I said, we are no exception to the rule. Even in countries such as Hungary, the Chinese investments hardly go to manufacturing; they most often go to trade or commercial offices. What Bulgaria needs is to demonstrate that there is one Chinese company that works well here.

I am rather optimistic in that respect that when the car manufacturing plant of Great Wall Motors and Litex Motors in Bulgaria’s Lovech starts production, this will emerge as a major success story. What is more, a lot of subcontractors and suppliers will probably move into Lovech, so this will be a very good example.

Other than that, the planned Bozhurishte Industrial Zone near Sofia has good potential and all prerequisites to attract such investments. As far as I know, the project saw some delays because of land expropriation procedures.

But on the other hand, National Company “Industrial Zones” and we from the InvestBulgaria Agency are trying to make aware as many businesspeople and decision-makers in China as possible about this industrial zone. The moment we see one or two Chinese companies move in, the wheel will start turning.

You mentioned air cargo and Bulgaria’s logistics and transport potential. Do you think transit fees from air, sea, river, railway, and truck shipping can ever become as substantial for the Bulgarian economy as is FDI?

I happen to know closely a person whose company does such business, who told me that cargo processing at a Bulgarian airport costs 10 times less than in the USA.

This is very good business for many of the large transit zones around the world. I am not an expert but I think that we’ve got the potential. If we manage to get one large distribution company to set up a large storage and re-processing facility, I think it is totally possible to seek to become a major hub. Bulgaria has the necessary preconditions for that. For example, the land is cheap, business costs such as labor and utilities are much cheaper than elsewhere.

Bulgaria hopes to finally start capitalizing on its geographic location. Maps by InvestBulgaria Agency

Can we go back to your point about Bulgaria’s marketing?

Yes, here we can announce something we’ve been doing and will be doing in the months to come. The InvestBulgaria Agency is a recipient of EU funding under Operational Program Competitiveness. We have a rather serious investment project to promote Bulgaria as an investment destination. It started in May 2010. Since then, we have completed all analytical and strategic activities.

The most important of those probably was a report that we drafted in cooperation with AT Kearney in order to single out priority sectors for attracting investments. We analyzed Bulgaria’s potential in terms of economic sectors and what entities we should target as potential investors. We then carried out a marketing survey with about 3 000 firms in the USA, EU, China, Japan, Korea in order to check out their awareness about investing in Bulgaria.

Meanwhile, we carried out an analysis of the ways of helping investors when they come to Bulgaria by comparing the work of similar investment agencies in Central and Eastern Europe as well as several cases from other regions.

We are now about to complete a legal analysis as well as a survey of information sources that can be of use when we respond to inquiries by investors.

This analytical part of the project was pretty big in terms of work but rather small in terms of funds and visibility outside the Agency. However, what we will be doing over the next almost 2 years will be the opposite – we will focus on the results and there will be much public visibility.

We are going to organize nine big international forums and conferences. Five of those will be in Europe, one or two will be in the USA, and the rest will be in Asia. They will be dedicated to the economic sectors and topics that we singled out together with AT Kearney.

These events will be different from other the ones done in the past in the sense that their purpose will be to target a small number of people who A) are from the respective industry; B) occupy a sufficiently high-ranking position so that they have a sway in decision-making.

This project is the first out of three or four similar ones. In another such project we plan to organize three business events supported by some global business media such as The Economist, The Financial Times, Bloomberg, etc.

The other thing we’ve started to do is developing new promotional materials for investing in Bulgaria. Because we do have good ads for Bulgarian tourism regardless of all criticism. Basically, Bulgaria has awesome nature and great history and it is enough to put together several photos of the Black Sea coast, the mountains, the Rila Monastery and Veliko tarnovo, and the ad writes itself.

However, the Bulgarian state has never produced brochures or ads that declare that Bulgaria is a great place to come and do business, for example, in the field of electronics or engineering. We have had plenty of good materials but they are statistical and technical, not promotional.

Let’s not forget that the people who read this stuff are businesspeople, not engineers. The CEO of Mercedes probably can’t assemble a vehicle, and the CEO of IBM probably doesn’t know how the software is developed exactly but these people know how to do business. So we have really gotten down to business in coming up with something efficient and useful – striking the right messages, and the necessary five photos, five graphs.

We hope that all eight brochures for all of the eight sectors that we selected with AT Kearney will be ready in two months.

What are the eight economic sectors that your analysis identified as having the best potential for attracting FDI?

First, machine-building;

Second, electronics and electronic engineering. In these fields, we can point to firms such as Montupet, Liebherr, Festo, ABB, Schneider, Yazaki who work successfully in Bulgaria;

Third, chemical industry – including organic and non-organic, as well as production of pharmaceuticals;

Fourth, agriculture and food industry;

Fifth, outsourcing. Under outsourcing we don’t mean the technical side of outsourcing but the outsourcing of services: financial, accounting, client relations, customer care, human resources, technical support. This is a very dynamic industry in the past 7-8 years, especially after the crisis, which is easy to understand since the construction of a large chemical factory requires enormous capital spending of several hundred million euro at the beginning, while a call center with 1000 doesn’t have that;

Sixth, information and communication technologies (ICT) - not just the production of electronics but also the development of software. Here we have companies such as Johnson Controls who develop software for cars produced all over the world, or Sap Labs; or very successful Bulgarian firms such as Telerik, Musala Soft, Sirma Group;

Seventh, transport and logistics, and in particular the development of multi-modal transport terminals and logistics hubs;

Eight, medical tourism, medical services, healthy lifestyle, spa industry, and green technologies.

These eight sectors cover a pretty substantial segment of the economic life but the most important thing about them is that they are not speculative sectors, and a well-crafted PR campaign could generate interest towards Bulgaria. From that point on, incentives that have been well thought through can help the investors to select Bulgaria.

How have the changes to the Investment Encouragement Act played out in the past year and a half since our interview in June 2010?

Last year we reduced the minimum requirements for granting Class A and Class B investor status to foreign investors but to be fair these changes were evolutionary rather than revolutionary.

We are now working on some new changes, new measures to encourage investments. Let’s point out that our analyses confirmed that Bulgaria’s Investment Encouragement Act is great when it comes to incentives having to do with land and infrastructure.

This is good for manufacturing firms. But in a time of crisis or an inter-crisis period the projects that get developed the fastest are not in the manufacturing but in the services industry. And hardly anybody there cares much for land or infrastructure. If you’re doing business process outsourcing you don’t need a plot of 20 decares or a road but a building at a business park with all communications infrastructure so that you can move in and start working. So speed is one of the major factors here.

One of the measures to encourage investments in the services that we consider focuses on the creation of new jobs with higher added value.

On the other hand, however, we should not go to extremes when it comes to seeking higher added value because one of the major conclusions from the report that we compiled with AT Kearney was that in Bulgaria the hi-tech and high added value activities are not that many; the Bulgarian labor market doesn’t consist mostly of engineers, architects, doctors, and IT developers.

We shouldn’t disregard the reality that in Bulgaria many people work in the trade and restaurant business, for example. That is why, it is good to think of those investments that can provide employment for these people, not only for those qualified to work at nuclear labs and laser research centers.

What are the measures in question that you have in mind?

We are still working on them, and it is hard to identify the most efficient ones. On the one hand, we are trying to stimulate new investors to come here. On the other hand, this should be done in a way that would not upset those who have already invested in Bulgaria. It would be wrong to end up in a situation where we are accused of aiding a firm do the same thing that another one has been doing in Bulgaria for years on its own.

But, most of all, we are focusing on such measures that will have the most sustainable effect on the economy. Our idea is to stimulate the creation of jobs which in turn could bring in new investments. We have made certain progress and I hope that within a few months we will have managed to finalize the draft law and to submit it to Parliament.

Should Bulgaria be worried about the demographic situation and its labor resources when it comes to the economy and foreign investments?

Yes and no. Yes, we should be worried because many Bulgarian students are abroad, many of the skilled Bulgarians are also abroad, and it simply wouldn’t be serious to say that this isn’t important for the economy.

On the other hand, however, we are also seeing lots of positive examples and success stories – There are companies such as HP which – with the opening of their new center in Bulgaria – managed to attract a lot of young Bulgarian specialists from abroad to work there.

Also, there is a well developed organization of the Bulgarian students from abroad who organize events every winter to meet with employers from Bulgaria about career or internship opportunities. We at the InvestBulgaria Agency are doing the same thing. For the past two years, I’ve had 15 interns, half of whom came from some of the best universities in the world, and the half being great students at Bulgarian universities.

So there is definitely great interest in employment opportunities in Bulgaria on part of the Bulgarians abroad, and we are working to bring here more foreign investors that can in turn make young people come back.

Is Bulgaria benefiting a lot from firms leaving Greece and Romania and coming here?

We at the Agency work with a relatively small number of firm but these are firms which investing large amounts of money. The Greek and Romanian companies “moving” to Bulgaria are mostly small and medium-sized enterprises so I have no way of telling if there were many or few of them.

The statistical data of the Bulgarian National Bank also doesn’t capture them very well because the process is different from that of the large investors – a Greek SME would not transfer its money to open a Bulgarian plant so sometimes these funds aren’t counted or at least not in that way.

I think that it is very logical to see this trend because Bulgaria is next to Greece and right now our economy is a lot more stable, with low taxes, favorable business costs, so the interest towards the Bulgarian economy will keep growing.

Talking about stability, we have some very interesting graphs here that we would like to bring to the attention of your readers.

Graph 1: Bulgaria is the only country in Europe with a credit upgrade by Moody's since the beginning of 2010.

The first one (Graph 1) shows the credit ratings of the European states that have been upgraded or downgraded by Moody’s Investor Service since January 2010, with the exception of Spain and Russia. With the exception of Bulgaria’s upgrade in July 2011, all others have been downgraded. Bulgaria’s indicator is the only one going up, which is pretty well.

Graph 2: Average government debt in Europe (2005-2010) vs. average budget deficit/surplus (same period). Source: InvestBulgaria Agency

In this other graph (Graph 2) we tried to compare countries by two major fiscal factors: budget deficit and public debt as a percentage of the GDP. The average debt of the European countries is about 70%. Most of the countries are in the middle section but some have both very high debt and high budget deficit. 

Bulgaria is the only country from our region that is among the seven countries European countries with low budget deficit and low debt. So when talking to international politicians or foreign investors we usually get asked, “Bulgaria – you are next to Greece so the situation there must be pretty bad.” But we generate some dismay when we show them these graphs.

What is your forecast for Bulgaria’s FDI in 2011?

After all these explanations about statistical methodology and trends it would probably be unsafe to claim there is one single institution that can make a correct forecast.

But what we see is that there is definitely growing interest among international investors towards Bulgaria.

The investment process is pretty long, starting in most cases 2-3 years before the investment itself can be finalized; in includes analyses, desk research, comparisons of investment destinations, and delegations visit the locations only when their number is reduced to 5-6.

 In 2010, we had probably two or three foreign companies send in high-ranking management delegations to enquire about large-scale investment projects, and 20-30 information requests.

In the first seven months of 2011 alone, we had visits by 15-20 senior management delegations, and over 100 enquiries.

Things are looking brighter from this point of view. It will take 2-3 years before we see new jobs from these projects but investor interest in Bulgaria is definitely growing.

As far as the amount of FDI that Bulgaria will get in 2011 is concerned, investments in manufacturing and energy in Bulgaria are pretty constant – about EUR 1-1.5 B per year. But we cannot make a prediction about the end balance because of the intercompany loans.

Overall, however, I think our job isn’t so much to make forecasts as it is to generate greater interest towards Bulgaria.

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Tags: FDI, foreign investments, foreign investment, Foreign investors, InvestBulgaria Agency, Borislav Stefanov
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