Galery

1

Victoria Mindova

The deterioration of the financial situation of Greece and the gloomy outlook in the medium term have driven many companies in the country to seek a more attractive business environment in neighbouring countries. The Executive Director of InvestBulgaria Agency Borislav Stefanov spoke specifically to GRReporter and presented the comparative advantages of Bulgaria and the key sectors that provide opportunities for growth and profit.

What are the advantages of Bulgaria compared to its neighbouring countries? Why should investors prefer our country to Romania, Serbia and Turkey?

The choice of a country depends mainly on the sector in which investments are made. The factors that determine the investment interest involve labour costs, cost of electricity or land. For example, investments in the chemical industry focus primarily on machinery, equipment and electricity price plays an important role. Bulgaria has a priority in this respect compared with other European countries, because the price of electricity is much lower than the average European levels. It is a very important factor for industries related to the production of glass, cement and other similar types of production as well. Labour costs play a major role in light industries such as textiles and apparel. In the IT sector, the staff’s preparation and level of knowledge plays the most important role. Bulgaria has established traditions in the IT sector and in the development of software in particular. In the field of outsourcing, there are many companies that rely on staff with specific expertise and knowledge of many languages, no matter whether they are standard languages ​​such as English and German or more unpopular ones such as Scandinavian, Dutch and other languages.

One factor that is important for Bulgaria and which is not always considered in the first place but which also plays a role is the macroeconomic stability of the country. Certainly, a company never goes to a particular country because the country has a good credit rating or because it has a low sovereign debt. Factors such as taxation, costs of labour and raw materials are taken into account in choosing where to invest. However, if there is a long political or financial instability, recession or higher deficits in a country, they affect the business sooner or later.

From this perspective, Bulgaria has an advantage compared with our neighbouring countries. Macroeconomic indicators remain stable and good. Costs of doing business are low and the quality of production is good. As you know, if price was the only thing that mattered, there should not be production anywhere else except in India and China. In other words, Bulgaria offers a very good balance between price and quality of production. Speaking about price, we include taxes and fees, which are better than in Romania for example. They may be roughly the same as those in Serbia, but we are members of the European Union. The price of land in Bulgaria is very competitive too, whether we are talking about land for industrial, construction and agricultural purposes. Thirdly, it is important to note the strategic location of Bulgaria. The country provides an easy access to the European Union, to Russia and the Middle East via Turkey. The five major transport corridors of the European Union cross Bulgaria, which is a sign of the country’s importance as a logistics centre. To countries outside Europe, we try to present the advantages of Bulgaria as an entry point for distribution to the European Union.

What are the strategic sectors that have development potential in Bulgaria in your opinion?

Two years ago, we assigned a big company the task of making a detailed analysis of the capabilities of the Bulgarian economy. The results have shown eight most promising sectors that offer the greatest opportunity for development and growth. These are mechanical engineering, namely automotive machinery, chemical industry (organic and inorganic), electronics and electrical engineering, food processing, transportation and logistics, information technology (software development), outsourcing and medical tourism. These sectors are preferred because of certain geographical, natural features that are unique to Bulgaria and because the combination of cost and work force is very good.

Electronics and industry have begun to heavily grow over the past year. In the pre-crisis period of 2001-2009, investments focused mainly on finance, real estate and trade. The combination of these three sectors held between 60% and 90% of the flow of foreign investment depending on the year of accounting. After 2009, the interest in these three sectors waned. However, there was significant interest in manufacturing sectors such as mechanical engineering and electrical engineering. After the wake of the crisis, many European companies started to reconsider issues like where they delivered from, where they processed, where would be the most advantageous location to position their plants and how they worked. As result, they have turned to Eastern and South-Eastern Europe. In other words, their customer base remains in Western Europe, but their production moves to the east because transportation is much faster than if the production base were in China, and the quality is better. This is probably why many companies from the fields of mechanical engineering, electronics and electrical engineering have repositioned here. The quality is higher, the price is not much different, but the delivery time is much shorter.

Another important sector that is rapidly developing in Bulgaria is the contracting out of a company's internal services and activities, or the so-called outsourcing. This sector employs over 15,000 people and tends to grow. A good example of outsourcing is Coca-Cola Hellenic, which has outsourced a large part of its internal operations in Bulgaria. If I am not mistaken, Coca-Cola Hellenic operates in over 20 countries and a major part of the activities of the company is performed from Sofia. In Bulgaria, there are many companies providing services in the field of accounting, finance and control for international corporations. Currently, a number of major international corporations have contacted us to establish a centre for internal activities in Bulgaria, as in the model of Coca-Cola.

According to the chairman of the Athens Chamber of Commerce Konstantinos Mihalos, the model of Bulgaria is not very successful. He says that the very low level of wages in the country is limiting the purchasing power in the domestic market and this prevents large investors from entering the Bulgarian market. (Mihalos says that when an investor enters a specific market, he wants to sell 70% of production in the domestic market and to export only 30%). Do you agree with this statement?

I cannot fully agree with this statement. This definition of 70% domestic consumption and 30% exports is quite conditional. Companies such as Hewlett Packard employ five thousand people in Sofia, but all their customers are in foreign markets, for example. Or I do not think that Volkswagen prefers Slovakia, because the country has a large domestic market.

On the other hand, I cannot but agree with the fact that Bulgaria remains one of the poorest countries in the European Union. This could be a problem in attracting investors, who are interested in the domestic market. These type of companies would prefer to invest in a rich or a large country instead of in Bulgaria. For example, in a country like Russia, wealth per capita is not high but the market is huge and it attracts the interest. Or a country like Switzerland, which is small in size but the population is rich, may be preferred. These types of investors are primarily active in the service sector, such as banks, retailers and other companies of this type. Bulgaria remains a competitive environment for attracting manufacturing companies. I do not think that the Bulgarian market is a big problem. An example of this is the fact that the largest companies present in the country are not interested in the Bulgarian market. We are part of the European Union and if something does not sell in the local market, it can be easily launched in Germany, for example.

Do you agree with the statement of the chairman of the budget commission in the Bulgarian National Assembly Menda Stoyanova that the tax on the interest profit will stimulate investment?

Theoretically, reducing savings will increase investment or consumption. Actually, it's hard to comment on because they compare interest rates on deposits of citizens to investments made by companies. The fact that some people keep money in the bank to earn interest does not mean that they will put it into investments after taxing it. The truth is that savings in Bulgaria have been at record high levels in recent years and it is common for savings in banks to increase in times of crisis. When people are not sure what might happen in a few months, they prefer to keep their money and not to spend it. It's better to put the money into production or consumption, because it moves the economy, but I would refrain from assessing the specific issue.

How has the European debt crisis affected investment in Bulgaria? Have Greek investments dropped?

Investments in Bulgaria have substantially declined since 2009, but this is a consequence of a change in their nature, as noted earlier in our conversation. The money put previously into finance, trade and real estate was reported as investments by statistics, although ordinary people imagine plants and machinery when they hear the word investment. The funds invested in the construction of shopping malls, financing of banks and the development of commercial sites are gone but the investments in manufacturing have remained and the debt crisis has not affected them seriously. It has probably affected large-scale projects for over several hundred million euro.

Massive realignment of the financial sector in Greece is expected. A merger of banks with a strategic position on the Bulgarian market has already begun. How will this affect our market?

As far as the Bulgarian market depends on Greek banks, I could say that if the branches in the country were receiving funds from the parent companies in previous years, now the total investments in the financial sector as a whole are dropping. If pre-crisis investments in the banking sector were between one billion, and one and a half billion per year, which was largely due to Greek banks, these amounts have recently fallen to 200-300 million annually. This means that there is a reduction of investments in general.

What are the main steps that must be taken to attract a businessman to invest in a specific market, according to the Bulgarian experience?

One of the first things that need to be done and it is often underestimated is the good marketing and  nowledge of the country. Bulgaria has always suffered from being very small and relatively unknown. It is not even so much that it has a bad image but rather that it has no image at all. The biggest companies have consultants and whole departments to assess the conditions in different countries but in most cases, the average business cannot be aware of the comparative advantages of Bulgaria, because there is not enough information. The avalanche effect is in force with us. A business activity, which has already established itself in Bulgaria, attracts other SMEs, which trust the assessment of those already in the market. It took some time in Bulgaria. In the early 1990s, there were almost no foreign companies in the country. Then, those, which had established themselves in the market, attracted some of their partners and investment began to increase. We need more than the good word of the companies that are already operating in Bulgaria; we need a more purposeful policy at state level to seek active investors.

On the other hand, the incentives to attract investors are very often underestimated. Each country has a set of rules and incentives for potential investors. Many large corporations choose initially 10 to 15 countries in which they could invest. Next, they select two or three countries. At this stage, incentives different from those of the rival countries should be provided in order for the country to be distinguished. It does not matter whether these incentives involve taxes, land or labour costs. Therefore, the country should prepare such a package, which is good for investors and which does not cause damage to the country. In other words, it does not make sense for a country to give ten million to attract five, but the opposite would make sense.

Thirdly there remains the overall business climate that includes macroeconomic and political stability, taxation, judiciary, efficient public administration, lack of transparency and corruption. In Bulgaria, the judiciary has much to do but there is an improvement in the activities of public administration and its regional organizations.