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Economy Minister Traicho Traikov: Major Investors' Trust Indicates Bulgaria's Economic Potential

Investors of the Decade 2001-2011 » INVESTPOLICIES | Author: Ivan Dikov |February 26, 2012, Sunday // 05:14
Bulgaria: Economy Minister Traicho Traikov: Major Investors' Trust Indicates Bulgaria's Economic Potential Photo by 168 Chasa weekly.

An exclusive interview with Bulgaria's Minister of Economy, Energy, and Tourism Traicho Traikov for the "Investors of the Decade" Business Survey of Novinite.com (Sofia News Agency) and Novinite.bg.


Between 2001 and 2011 Bulgaria attracted almost EUR 37 B in foreign direct investment. How do you assess this result – is that a lot or too little?

Bulgaria's total FDI in the past ten years is indeed substantial, and this figure is useful as a starting point for analyses and comparisons.

But in addition to a high FDI figure, it is also important to have the success stories of strategic investors with long-term plans for development in Bulgaria. In 2011, two foreign investors – Lufthansa Technik OOD and Knauf Bulgaria EOOD – received a second certificate for new projects under the Investment Encouragement Act.

A number of other large companies continue to expand their activities. In this sense, the trust of major companies who are already active in Bulgaria is an important indicator about the quality of the Bulgarian business environment and the potential of the Bulgarian economy.

Why is it a good idea for a foreign investor to choose Bulgaria as a place to do business?

In addition to Bulgaria's advantages as an investment destination that are usually pointed out – the macroeconomic and financial stability, the lowest taxes and lowest operational costs in the EU, legislative expansion of the incentives to invest – another key indicator for the potential investments is the trust in the stable development of those foreign companies that are already operating in Bulgaria.

Of course, there are other reasons to invest in Bulgaria as well which have to do with the country's geographical location, the quality of the human resources – high qualification and, unfortunately, relatively low labor costs in comparison with other EU member states.

You recently declared that Bulgaria is undertaking an ambitious investment program in order to become one of Europe's top investment destinations through an all-out reform and investment encouragement strategy. What is the gist of this program?

We have carried out an analysis of target economic sectors for attracting investments, and we have identified priority economic development fields: IT, green technology, energy efficiency technologies, healthcare technologies. We are conducting a policy of priority stimulating of hi-tech sectors, encouraging hi-tech investments, and increasing the competitiveness of the Bulgarian economy.

We are currently drafting amendments to the Investment Encouragement Act in order to optimize and decentralize the certification and incentive procedure for new investment projects.

By introducing additional certification criteria based on the number of new jobs created by the respective project, we will manage to expand the stimulus base, especially when it comes to the services sector.

We are considering a new investment incentive connected with partial reimbursement of an employer's social security costs for a certain period of time in order to stimulate the creation of new jobs. This is a measure in support of employment policies, which, when focused on high value added sectors will be a tool for achieving sustainable growth.

The analysis of the priority sectors I quoted above has discovered centers of competitiveness that already exist in the Bulgarian economy. The aim of our investment marketing is to attract even more investors in these sectors and to create sustainable industrial clusters.

In December 2011, we started an investment marketing campaign including through sector-oriented forums in target countries in Europe and Asia, drafting of information brochures, organizing tours for journalists, among others.

Bulgaria's exports are growing but much of this growth comes from raw materials and lo-tech sectors. How can Bulgaria attract investors in high value added sectors? What are some specific mechanisms that use to achieve this goal in terms of state policy?

As part of meeting Bulgaria's commitments under the Euro Plus Pact in order to improve Bulgarian industry's competitiveness, we are planning to adopt two major tools for shaping and implementing an intelligent innovation policy: drafting a new Innovation Strategy, and adopting an Innovations Act.

The future law for innovations will institutionalize Bulgaria's National Innovation Fund, which will create an opportunity to guarantee conditions for the economy's sustainable development based on innovations. The adoption of this legislation will help achieve crucial goals including a harmonization of the policies for development of science, technologies, education, and innovations.

It will provide for complementary funding from sources for stimulating innovations, and will define the rights and responsibilities of the institutions and persons conducting Bulgaria's state policy on innovation; it will also guarantee sustainability in measures supporting the innovation activities of enterprises.

By applying the law and the statute for activities of the Bulgarian Innovation Fund and the new Innovation Strategy, we will guarantee the adoption of a clear vision for innovation policy in the next 10 years; we will define national innovation policy priorities; we will provide for control over public spending for encouraging innovations; we will implement measures for regional development with innovations, and will create clear and simple mechanisms for financial and non-financial incentives for innovations by private enterprises.

In addition, we will set in a single framework all national, bilateral, and multilateral programs for stimulating innovation such as EUREKA, EUROSTARS, EU framework programs.

We plan to complete the draft Innovations Act procedure, and to see the law adopted by the end of 2012. As far as the Innovation Strategy is concerned, we plan to distribute the draft for public discussion at the end of 2012.

How do you evaluate Bulgaria's human resources (i.e. labor force) – especially with respect to the declining demographic potential, the so called demographic collapse and the "collapse" in Bulgarian education, as it is often described? Can these factors hinder Bulgaria's economic growth?

Of course, these are risk factors. We are taking this risk into account. We are working together with Education Minister Sergei Ignatov, and we are aware that we need an educational reform but reforms cost money, and it is hard to finance everything at the same time in a time of crisis.

Things are not black and white because the economic crisis had another result. Many Bulgarians have returned home from Greece, Spain, Italy, and France.

Of course, this is no consolation, and we must keep a stable environment and keep doing reforms for Bulgaria to have a long-term perspective.

Vast regions in Bulgaria suffer from both economic underdevelopment, and lack of perspectives, while investments are concentrated in Sofia and a couple of other cities. How can these imbalances be overcome so that all of Bulgaria would become attractive for investors? Perhaps by dispersing industrial zones across the country?

In order to redress the regional imbalances in investments and economic activity, Bulgaria's Investment Encouragement Act stipulates lower thresholds for the certification of investment projects, and, respectively, easier access to stimulus measures when the investment is based in municipalities with a higher than average unemployment rate.

Out of a total of four investment projects that got certification under the Bulgarian Investment Encouragement Act last year, four are based outside of Sofia, and one is in a municipality with high unemployment. Out of the 15 projects that got certified in 2010, 14 were outside of Sofia, including 10 in municipalities with high unemployment.

In addition, investors in municipalities with an above-average unemployment rate can get a 100% corporate tax break under the Corporate Income Taxation Act.

The Bulgarian economy is betting high hopes on several large-scale energy projects. One of them – the Burgas-Alexandroupolis oil pipeline – is already out of the agenda of the Bulgarian government. What are you expectations about the other energy projects – for example, the talks with Russia's Atomstroyexport for the construction of the Belene Nuclear Power Plant, the potential for new reactors at the Kozloduy NPP?

There will be clarity on the price options for the Benele NPP after the completion of the talks on key aspects of the projects such as reaching an agreement with Atomstroyexport on the final price and the final version of the construction contract; defining the capital structure of the project (the amount of the credit, the investment capital shares, and the investors themselves); an assessment of the Bulgarian participation (the investments made to date).

There are international contracts for the price of the construction of NPPs. Even though they provide a reference point, each country, construction technology, the responsibilities and service scope of the executor are specific for each project. As I noted above, the construction contract and the shareholding structure of the Belene NPP have not been finalized, and therefore the final price and "value" of the plant cannot be determined.

HSBC together with NERA Economic Consulting, leading market consultants, have carried out a market study with forecasts for price development at the regional electricity market including Bulgaria, Romania, Greece, Turkey, Serbia, Montenegro, and Macedonia about the potential resources of the Belene NPP. The major conclusions of the study are:

There is a need to invest in new base production capacities in the region – the Belene NPP is going to reduce substantially the emissions of CO2 in Bulgaria; a number of factors influence the long-term electricity prices in Bulgaria such as: commodity prices, electricity consumptions; CO2 prices; new participants, technological development.

With regard to your question about the potential to build a seventh and eighth unit at the Kozloduy NPP – the idea for the construction of a seventh reactor dates back to the 1980s; it stipulated that after the small units 1-4 are no longer in operation, the construction of a Unit 7 and Unit 8 can be started.

Since then, there have been three studies about the potential construction of new units at Kozloduy, the last one being a preliminary study by the Spanish company Ibedrola in 2010 assigned to it by the Kozloduy NPP management.

The main conclusion from these studies is that the Kozloduy NPP site can fit two new production units, respectively units 7 and 8, by using the resources on the site, the available infrastructure, and the experience of the staff.

Keeping in mind the complex economic situation in Bulgaria and the competitive advantages of the Kozloduy NPP site – the already existing electricity and technical infrastructure, the radiation monitoring system, the working emergency plan, the facilities for secondary processing of radioactive waste and storing of processed nuclear fuel, the trained highly-skilled personnel, and housing facilities – it is only logical to consider the possibility for construction a seventh unit in Kozloduy.

Of course, we need to go through several phases of new studies and analyses; when those are completed a decision to start the development of the project in perspective can be made.

What about the development of the two major gas transit pipelines that are to go through Bulgarian territory – South Stream and Nabucco?

It is not necessary for me to comment on the importance of the Southern Gas Corridor for the security and diversification of natural gas supplies in Europe. At the moment, different versions of the realization of this extremely important energy corridor are being discussed. They differ in terms of routes, capacities, and time frames.

Perhaps the most large-scale and integral of the Southern Gas Corridor projects is the Nabucco pipeline, which has its place when it comes to providing the much needed diversification and security of natural gas supplies. Bulgaria is keeping up its active work on the implementation of this project as one of its six shareholders.

However, as you know, the crucial question for the successful realization of any infrastructure trans-border gas supply project is the issue about resource availability – that is, providing sufficient and secure amounts of natural gas in order to justify the implementation of such a large-scale investment and to guarantee the project's profitability.

In this sense, the final configuration of the Nabucco project and its positive development will be directly connected with the available resource base.

Presently, the major potential resource base for Nabucco is Phase II of the Shah Deniz II field in Azerbaijan. That is why there are intensive talks with the Shah Deniz Consortium, which, of course, together with Nabucco, also has talks with other projects such as ITGI, TAP. As you know, parallel to that, the Shah Deniz Consortium, and some of the partners in it (BP) are considering and evaluating projects for transit initiatives of their own.

As early as October 2011, the Nabucco project presented its overall natural gas transportation proposal to the Shah Deniz Consortium, and at present it is conducting intensive talks.

These talks are already taking into account some major new developments including the recent agreements between Azerbaijan and Turkey with respect to their initiative for a potential TANAP project on Turkish territory, whose realization can lead to a new configuration and a different starting point for the Nabucco project.

We are yet to see which one of these projects will happen first, and what their scopes and capacities will be. But it is certain that work will continue on the other ones and will go far beyond the scope of the Shah Deniz 2 field in terms of both time and resources.

As far as the South Stream gas transit pipeline is concerned – after the completion of the preliminary study, the shareholders – the Bulgarian Energy Holding and Gazprom – are already working actively on the next phase of its development.

As the most recent development, I can point out that we have started the second phase from the joint project company's tender for selecting a company for the design, territorial organization and Environmental Impact Assessment. We expect to have selected an executor by the end of March 2012 and to see the start of the EIA activities in April 2012.

How does the Bulgarian government intend to cope with the ever growing concerns in the Bulgarian society that shale gas exploration can poison the underground waters all over Northeastern Bulgaria, the grain-producing Dobrudzha region?

There has not been any shale gas exploration in Northeastern Bulgaria. After the Bulgarian government adopted the decision to ban the hydrofracking technology for the exploration or extraction of natural gas and oil on Bulgaria's territory, we need to take strict measures to apply it.

First, we now need to hold meetings with the individual investors because it is necessary to give them clarifications about the scope of the ban. Because of the no so correct and precise definitions, there are various interpretations that cause concern with these companies.

Second, a working group has already started to work as part of the Environment Directorate-General of the European Commission (including representatives of the Bulgarian Ministry of Environment and Waters), which is discussing within a European-wide context the problems connected with the exploration and extraction of non-conventional natural gas and is to come up with environment protection measures. There is probably going to be an EC directive or a regulation. Regardless of that, we are going to continue to gather and analyze information about the best international practices in this respect.

Together with the Bulgarian Academy of Sciences, the University of Geology and Mining in Sofia, and foreign and Bulgarian experts we are creating legal requirements – such as an obligatory methodology for detailed geological studies at drilling sites and the area around them; constant monitoring of waters and air, drilling waste, and drilling requirements.

All of them need to guarantee as much as possible the protection of the environment and underground layers in various geological, tectonic, and hydrological conditions. Similar in-depth developments already exist in some states in the USA and Canada. Of course, it is not sufficient to only draft the legislation but there also needs to be supervision on the companies' activities. Why not have the local authorities participate in it?

By the way, we should not underestimate the existing Bulgarian environmental legislation, which is in line with the EU legislation that is widely recognized as good and modern.

What is it that Bulgaria lacks which doesn't let it turn into a truly leading global tourist destination? What must be the focus of Bulgarian tourism in the next 5-10 years?

Bulgaria is already a leading destination for certain markers and for certain products but there is a lot work still to be done. We must focus on quality, hospitality, and promotion.

Bulgaria can be more interesting and attractive if we develop its tremendous natural and cultural richness into a balanced and unique tourist product reflecting the contemporary trends and widely promoted on the right markets.

The targeted diversification of Bulgaria's tourism products through the development of attractions and offers in cultural, spa, balneo, rural, and eco tourism will certainly expand its market positions. That way we can turn our comparative advantages into competitive advantages. We also need to take advantage of the fact that we are a unique part of Europe, especially when it comes to more distant markets.

On the other hand, the investments that are being made in the overall and tourism infrastructure are yet to have a positive impact on the quality of the products and tourists' satisfaction.

They are a great development base but their impact will be limited unless we add the understanding that tourism is not just accommodation and food, and that tourist products are complex and their quality development is a matter of awareness about the common responsibility of all spheres – tourism sector, infrastructure, agriculture, healthcare, security, education. Bulgaria can grow to the level of a global destination only through joint efforts and a culture of hospitality in the entire society.

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Tags: Traicho Traikov, Economy Minister, Economy Ministry, Investors of the Decade
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