Bulgaria is an emerging economy. Growth has returned, exports are flourishing and the private sector is developing.

Since July 1996 more than ten foreign companies have invested through the Cash Privatisation programme, a greater number than in any previous year. The cumulative value of all foreign investment reached US$718 million in September 1996 and further major foreign investment is anticipated.

Bulgaria's attractions include:

• unsatisfied local demand from 8.5 million consumers;
• fast-growing exports to western markets, notably the European Union;
• strong export performance in ex-Communist markets;
• high-quality, low-cost operating conditions;
• valuable and accessible natural resources;
• assets and expertise with a strategic value, notably in the sectors which dominate industrial production;
• an attractive legal framework offering incentives to foreign investors;
• security of investment (equal treatment of foreign and local investors).

Investment climate: stable and improving

These attractions are reinforced by increasing political stability.

The Government's commitment to rapid market modernisation through foreign investment is backed and aided by the IMF and World Bank. This process is further supported by Bulgaria's Associate membership of the EU. The benefits include the harmonisation of a wide range of rules and regulations with EU standards, for example regarding customs duties on imported components and the re-export of finished goods.

The philosophy therefore is clear: to welcome and encourage serious investors, and to help them into the market at a pace which suits them, and in particular their corporate attitudes towards investment and risk exposure.

An economy on the move

Aggregate demand has recovered, most recently on an export-led basis. After a drop in real GDP of 11.7 per cent in 1991, positive growth resumed in 1994 and was followed by growth of 2.6 per cent in 1995. The latter figure was linked to a 27.5 per cent growth in exports in 1994-95 to US$5.1 billion.

Investment opportunities

This export growth reflects a successful reorientation towards developed markets to replace weaker demand in ex-Soviet bloc markets. However, Russia remains Bulgaria's largest trading partner, and the anticipated recovery of the Russian economy is expected to have a significant impact on Bulgarian exports.

Demand growth has also been linked to a shift in demand towards new products and services. This is indicated by the private sector's dramatically expanding share of GDP. The growth in private sector share has occurred in all the key sectoral groupings - agriculture, industry and services.

The privatisation of state firms is increasingly assisting the broadly-based introduction of market economy principles, so far through Market (or 'Cash') Privatisation; 1995 saw a 300% growth in market privatisation sales over the previous year. The start of Mass Privatisation sales in 1996 will further accelerate the process.

The structure of GDP by key sectors gives a rough indication of the spread of existing commercial capabilities. The industrial base and agricultural sector continue to play an important role in the economy, while on the service side trade has gained in importance (now accounting for 11.5 per cent of GDP).

There was a significant recovery in industrial output in several sectors in 1992-1995. The relative importance of industrial sectors is generally reflected in their share in exports. However, high-technology production, including mechanical & electrical engineering, will grow in importance. The fact that leading high-tech companies have established operations in Bulgaria reinforces this view. For example, Philips recently started to manufacture colour televisions here.

In services, private sector output has grown faster than the aggregate for private and public output. This in part reflects the dynamism of the private sector but also the privatisation of major service companies.

Tourism and travel, which has been designated a strategic sector, has seen strong growth in the number of foreign arrivals since 1991. The overall number of visitors from abroad grew by 17 per cent to about eight million in 1991-95, of which visitors for holidays and recreation increased 115 per cent to about 2.7 million. A comprehensive tourism development programme, covering planning, human resources and marketing, is under way, and is receiving support from the EU. This will help to re-position Bulgaria and make the country more prominent in the international marketplace.

Bulgaria's advantages

Those who have already decided to share in Bulgaria's future through investment in privatisation are diverse, and include well-known multinationals as well as smaller and medium-sized firms:

• Chemicals: Amylum/Archer Daniels Midland/Tate & Lyle;
• Construction Materials: Ytong Holding (Germany)
• Food and drink processing: Interbrew (Belgium - which bought twice), Kraft Jacobs Suchard, Nestlé (Switzerland);
• Mechanical engineering: Asea Brown Boveri (Sweden/Switzerland), Plansee Tilsit (Austria), Breakers A/S (Denmark);
• Transport: Internationale Spedition Willi Betz GmbH (Germany).

'A smart investor will see Bulgaria as part of a 'bigger picture' that includes Greece and Turkey. It's a region with a wealth of economic potential' (Lars Sjoborg, Ytong Holding, a leading European producer of construction materials, quoted in Global Finance. Ytong acquired Bulgaria's only cellular concrete producer in 1993).

'The Bulgarian people work hard and are proud of what they are doing ... Jacobs Suchard has created new jobs and increased salaries in real terms' (Bernhard Huber, Vice President, quoted in Global Finance).

'Bulgaria has a sensible wage scale' (Willi Betz, Managing Director of one Europe's largest trucking firms, quoted in Global Finance. His company acquired the leading Bulgarian trucking firm SOMAT in 1994).

Operating conditions & resources

Educational standards are a rough guide to labour force standards. The latest figures show that 40 per cent of the workforce holds university or higher vocational diplomas. Another 29 per cent holds full secondary school qualifications, while the remainder has reached an intermediate secondary level.

In addition, most Bulgarians have excellent foreign language capabilities. Russian is generally spoken, while English is the preferred second language among younger people. Certain schools teach all classes in a foreign language: English, French, German, Italian, Russian, Spanish or Arabic.

Wage rates are competitive, and wage growth has been modest. The average public sector monthly wage was about US$103 in 1995. Wages grew by an average of 7.6 per cent per annum in 1992-95.

Commercially important natural resources are focused on ferrous and non-ferrous metals, minerals and agricultural resources. Important mineral deposits include silicates, sulphides, oxides and calcites.

There is good infrastructure for domestic and international transport and communications. There are four international airports. Highways and railways link European axes, notably the E80 motorway, and provide the most direct overland gateway between Western Europe, Turkey and the Middle East. Black Sea ports offer excellent access to the Former Soviet Union and the Mediterranean, and via the Danube river there is a direct artery to Central and Western Europe.

Bulgaria leads Eastern Europe in telephone ownership, with over 40 per cent of households owning a telephone. Connections are rapidly improving, thanks to digital overlay and international gateway installation supported by the EBRD, as well as GSM and analogue cellular services. Satellite transmission is also available.

Duties on trade with the EU were recently cut by 86 per cent, as part of the wider harmonisation process resulting from Bulgaria's associate membership of the EU.

Profits can be repatriated, and the IMF Agreement of July 1996 specifies that there will be no currency exchange controls.

A wide range of international banks and advisers have well-established offices here. For increased efficiency and convenience, some banks are beginning to introduce electronic banking.

And last but not least, Bulgaria, and Bulgarians, provide a welcoming and amiable business environment. The country is steeped in history and beautiful to travel in. Holiday and leisure opportunities are wide and varied, ranging from the unspoilt Black Sea beaches to excellent skiing resorts.

Key incentives linked to privatisation acquisitions

There are two key incentives. One enables investors to obtain a dramatic discount on purchase prices (up to about 30 per cent). This is achieved through a range of debt-equity swaps. Both foreign and domestic investors have almost all used these discounted instruments.

The other incentive offers investors a tax holiday - 100 per cent relief for the first three years after an acquisition, and 50 per cent relief for the subsequent two years.

The cash privatisation programme is a major part of the Government's economic reform programme, and foreign investment is actively encouraged.

An acquisition through privatisation is a fast way to access clients and distribution channels, recognised brands, local know-how and infrastructure. Bulgarian partners will also have access to skills and technology which reflect the Centres of Excellence created in Bulgaria during the last few decades, and such assets can provide a strategic advantage across borders.

In most cases, taking the privatisation option is simply faster and less risky than greenfield investment in an emerging market.

Further, the tax relief and purchase discount schemes described above provide powerful cost incentives to those choosing to participate through the cash privatisation programme.

The Privatisation Agency: Aksakov St, 29 1 000 Sofia, Bulgaria. Tel: (2) 980 8275 Fax: (2) 981 6201 E-mail: bgpriv@mbox.digsys.bg
Web: http://www.privatization.bg