This is the story of an Italian investor who closed his enterprise near Plovdiv. The story was shared with an acquaintance of mine, and it explains why the businessman is leaving the country.


The Italian investor started his narrative with a rare admission that, as someone coming from the country that is home to the mafia, it is almost natural for every Italian to “honor” the traditions of oiling administrative and regulatory mechanisms. But back in Italy, says the Italian businessman, we estimate the price for working in our environment at a maximum of 10-11 percent of the business proceeds. Most of us never challenge this – we pay and go on with our lives and work. This is not a new tradition – it has been the same for decades and centuries. But what I have encountered in Bulgaria has exceeded even the most pessimistic assumptions. Would you believe, continues the investor, “I am asked to voluntarily ‘share’ more than a third of my money here, with nothing in return!?”.


How can I do business under these circumstances? Everyone wants his stake – from the most junior clerk in the municipality all the way up the power vertical. Although state and municipal employees have more than enough time to issue a requested document – 2 days max – and face no other obstacles to perform their public duties, suddenly, the music stops and the bureaucratic machine hits the brakes with fancy excuses filling the space – lack of capacity, lack of authority and pretending to be overwhelmed with competing work. Such a clerk would rather take a forced sick leave than issue the needed paper. This all occurs in the name of his share of petty corruption money. Moving up the hierarchy, says the Italian, things get nastier and uglier. Many end empty – nothing at the end.


This is not the fastidious investor breed, who every now and then, come to Bulgaria, but rather a street fighter accustomed to almost any “rough institutional ride,” and administrative maltreatment, having survived in different aggressive and hostile “environments,” and used to all regime types – from authoritarian to military juntas. Yet Bulgaria has proved a tougher nut to crack. The Italian looked for no special treatment, came with his money with the intent to make a profit, but also to generate jobs and income for his employees, to pay taxes and contribute to the “new EU Bulgaria.” He was one of many Italians, who during modern Bulgarian history, managed to contribute to the country’s economic and business history.


I shall withhold his name, as this is not so much a personal trouble, but a larger and far more worrisome symptom, a system failure that permeates the fabric of business-state relationship. The Italian businessman, I am told, is gone, never to return.


Think for a while. If someone takes away one third of its net income, any business will tumble – unless the “business” deals with narcotics, human trafficking, gambling, smuggling and generally the sectors that operate in the dark.


However, if you belong to the normal segment of the economy, you, as a businessman, can’t simply pass on the corruption cost to the end consumer by commensurately raising prices of goods or service. Moreover, the Bulgaria-based businessman needs to compete with foreign-based rivals, which are spared such costs, or they are marginal. Sooner rather than later, you’re going to eat your own capital, and within a year or two, your company will sink and declare bankruptcy. Even if you are brave enough to survive the initial corruption shocks, and dare to engage in barbaric cost cutting, ultimately you are doomed, as it will affect quality, and over time, will dump sales and revenues.


The cost of the ‘milieu,’ however, remains unchanged, fixed to the immutable corruption and administrative burdens. Finally, as bankruptcy procedures in Bulgaria are less sophisticated and mature than in the developed EU countries, you will still incur “extraordinary” expenses, depleting the remaining funds generated from the sale of the assets by the receivers in the final coup de grace.


Before the final exit from Bulgaria you will be “in shorts,” without much help from the ostensibly friendly employers’ organizations. Nor would any of them scare the government, promising a protest of 20,000 employees, albeit a virtual one. Justice can be served in court, but often it comes too little, too late. Ambassadors’ interventions help, but even diplomats stand little chance of breaking free the captured state obsession with the “sovereign rights” of kickbacks.


The success of Plovdiv as the most intensively FDI attracting city in Bulgaria may soon wither, especially if one compounds the looming labor shortage problem.


Consecutive Bulgarian governments have failed to accept that, as a member of the EU and NATO, we should treat EU and local investors on an equal footing. Foreign investment was a top priority in the years immediately after Prime Minister Videnov’s winters and before joining the EU. Departing from past policies of encouraging FDI, current rulers have embarked on discrediting the whole process of selling state assets – coining the term “bandit privatization,” although the bandit’s past could most often be traced back to roots in the Communist Party and the secret services. Over the last ten years, most of the various ‘nouveau riche’ editions emerging under Boyko Borisov’s government, have embodied the G-13 model – the same ‘bandit type of oligarchic capitalism that precludes competition from foreign investors or domestic non-oligarchic businesses. Systematically and persistently, the competitors of the Bulgarian oligarchs have been denied equal access to public procurement, acquisition of banks and key strategic assets – so as not to allow for easy and below par value acquisitions by the ‘selected’ few.


Hence, there has been the sharp decline in the quality of companies interested in investing in high political risk Bulgaria. It is suffice to recall the Vivacom tertiary acquisition, where interventions at the highest level of government practically forced interested U.S. and European investment funds out of the ‘tender’ process, despite offering materially higher prices. No one sought special treat, just a guarantee for a level-playing field and neutrality from the Bulgarian government.


Alongside providing a shield to political oligarchs, the Bulgarian government has helped develop a business xenophobia, affecting any foreign capital, including foreign trade chains, as some have already begun to pack their suitcases. There are primitive protection rules – from the suggestions for the inferior quality of goods that Westerners trade in Bulgaria to 50 percent mandatory quotas for locally produced goods in super and hypermarkets. Such “business patriots” really ponder the result – whether in the first instance there are enough Bulgarian goods to substitute imports and whether this will not affect prices. This amounts to a barely conceived scheme to overlay the true problem of the lagging competitiveness of local products due to the rising collateral costs of the corrupt environment; hidden and increasing direct and indirect taxation, administrative burdens; and heightened political risks.


The overwhelming propagandist interpretation of the true merit of the low profit tax as a key driver for foreign investment, an almost universal panacea, can hardly subdue the need for a deeper and holistic approach in understanding the genuine barriers to foreign and domestic investments that have dramatically cut FDI figures over the last ten years – from above Euro 1 billion levels per annum in 2007 to oscillating between +/- Euro 200 million in the last 5 years.


The level of the nominal profit tax rate, for example, which is the key buzzword in FDI attraction campaigns, in most projects is neither the trigger, nor a determining factor in the selection of investment location. In most instances, tax optimization schemes, including amortization rules for business-related expense associated with business development, promotion, travel, residence, financing, client service, advertising, training, marketing, charity, etc., largely offset lower nominal tax rates in which few things are recognized as expenses. It is quite possible that a nominal tax rate of 20 percent in a European country with broad expense recognition schemes would result in payment of less taxes than at the 10 percent nominal rate in Bulgaria.


When making the decision to invest and relocate a business to Bulgaria, boards of directors often weigh general business climate, political risk, hidden cost (corruption, admin barriers, rule of law), education base, availability and cost of labor, market size, global interconnectedness and quality of soft and hard infrastructure with much higher priority than tax rates. Risk management scenarios loom high and well above nominal tax rates. It is suffice to accommodate with general risk assessment and mitigation schemes the fallout of the Commercial Corporate Bank forced bankruptcy.


The lack of adequate policies addressing essential business climate problems, including insufficient skilled labor, inefficient enforcement of anti-trust regulation and judicial practices that level the playing field, completely neutralizing the advantage of cheaper labor, is a rather unpleasant picture that foreign investors and foreign companies face.


The World Bank’s Doing Business 2019 ranks Bulgaria 59th, well after Georgia (6th), Romania, Serbia, Croatia, FYR of Macedonia (10th), the Baltic States, Azerbaijan, Kazakhstan, Rwanda, Russia, Turkey, The Czech Republic, Slovakia, Slovenia, Moldova, Montenegro and Hungary. Only crisis-stricken Greece has a poorer ranking. Most of this abysmal status is due to low ratings for ease of starting a business (99), access to electricity (147) and paying taxes (92) – which sharply contradicts the government’s narrative on the attractive business climate.


Although these rankings are for general purpose use, they hold water in many quarters in the investment community.


Returning to the story of the Italian businessman who closed shop near Plovdiv, the narrative becomes more worrisome when transposing the current troubling signs onto the future.


It is challenging to impossible today to attract a high-quality, strategic investor in the banking sector into sectors of the economy that are essential for the robustness and the quality of the growth trajectory – high-value added products. Greek banks are leaving, one after the other, but new U.S., EU and Asian banks are not replacing them; just local Bulgarian owners show interest. An exemplary case is the investor in Municipal Bank, which no longer attracts municipal money, after being acquired by Bulgarian oligarchs. The lower capital base of Bulgarian banks translates into risk-averse, less-diversified and less-competitive crediting policies, most notably handicapping cross-border business and funding for larger and riskier projects, including start-ups and breakthrough innovation.


The only reason UBB sales did not fall into this category – Bulgarian owner acquisition – was its size and systemic importance.


Most, if not all, significant public procurements or public-funded investment projects – either in part or in whole – end up with indigenous Bulgarian companies that are part of the state-oligarchic network.


Even in EU funded projects, it is an uphill job for a foreign company to operate on its own, without taking on board a local partner, sometimes two – one to do the local content and the second to navigate the consortium through the murky waters of Bulgarian corruption.


One of the main reasons for the sharp decline in public spending has been different instances of deliberate feet-dragging while trying to secure tight control over the distribution of privileges and proceeds from the “manually” controlled competition scheme. The average share of project budgets reserved for corruption costs is so high that the subcontractors, which need to execute the final leg of the work, deem it is no longer possible for them to do the job without self-devastating financial and reputational risks. This is how the vicious circle closes – without the ultimate perpetrator in corruption chains – a final contractor – being ready, able and willing to execute the works, the whole chain of mediators becomes irrelevant. Hence, pre-arranged tenders are less and less possible due to a lack of companies committed to leg work. In time, this translates into the collapse of capital investment programs in the state budget and the accumulation of artificial budget surpluses.
The state-oligarchic power model prefers no public procurement over allocation of public money to companies and business outside the “power group.”


Government officials often quote relatively high GDP growth as a proof of successful policies, but they fail to back this with causal policy data. Most of the positive trends in the economy are the product of favorable international market trends. The quality of economic growth is far from what a laggard country as Bulgaria needs, nor is it sustainable over a long stretch of time. On the contrary, Bulgaria is not closing the gap with the EU member states normally used as a benchmark – Romania and Poland – as well as Turkey. Compared to 2007, when the country joined the EU, the GDP spread with Romania, Poland and Turkey in GDP per capita, at PPS against EU average, has increased considerably, fixing the laggard status of the country. Whereas Bulgaria has managed to narrow the gap to the 100 percent benchmark from 40 to 49%, i.e. a 9% increase, Romania has moved from 44 to 63% (+19%), Poland from 53 to 70 % (+17%) and Turkey from 47 to 65% (+18%). If current trends persist, Bulgaria might remain at the bottom even after the admission of new members to the EU, given the higher growth rates and dynamics in FDI flows to some of the candidate states.

Bulgaria’s transition model has arrived at the point of its self-denial. In order for the economy to grow in catching-up mode, it has to quit the state-oligarchic capture and corruption matrix, freeing up the flow of foreign and local market driven capital, especially that relates to high-tech imports and exports, allowing companies to compete on national, regional and European scale.

The best and cheapest way of entry for local business into the school of global competition comes via fighting for market share and clients on the Bulgarian market. If local business is unable to succeed on its home turf, it will not be able to compete internationally. That is why oligarchs rarely succeed in crossing border with products and services, as a captured state is unable to follow them abroad with perks and subsidies.
Thus, little and low-quality FDI results in lower GDP and welfare growth levels – on average between 0.5 and 1.5 % of GDP. Few observers and analysts would question the causal link between policy inadequacies/political risk and suboptimal growth trajectory. It is suffice to read the latest investor alert of IHS Markit, which shapes to a large extent the opinion of western governments and financial and strategic investors on the forecast for the Bulgarian capital market. IHS Markit warns of high political risk in the country that will be sustained throughout 2019 and beyond, as business should be prepared to face “extraordinary” attention from prosecutors and investigative bodies.

In other words, a leading authority in the international investment community warns of the likelihood of a repetition of the CCB story – raids on companies and arbitrary and gross interference by those in power.
As someone who has devoted essential parts of his life to the reopening and integration of Bulgaria into EU and NATO and to the resurge of the country’s reputation and its image in international business and political circles, I feel obliged to admonish, without sufficient balanced inbound and outbound foreign investments, Bulgaria will never be able to upscale its technology base and achieve adequate levels of convergence with European and global standards of prosperity and security.

We need an immediate and drastic change now if we do not want to condemn the next generations to a chronic laggard’s symptom, which epitomizes the policies of the past ten years.
Bulgaria and Bulgarians deserve a better fate.


Chairman of the BFIA

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