What Advice Do Investors Get on Bulgaria?

As British Ambassador I am asked almost as often by Bulgarians what I say about their country to investors, as I am asked by investors what I think about Bulgaria. I answer the same to both: a wonderful country, with real potential and excellent people, but some big problems, particularly in the rule of law and regulatory bodies.

Let’s start with the advantages. Bulgaria enjoys macro-economic stability and is a good performer in the region, with low deficit and public debt. The currency board ensures exchange rate stability. Despite the shocking independent audit report on KTB, the banking system seems well-capitalised and an appropriate size for the GDP of the country; Bulgaria has not gone in for exotic financial instruments and so has avoided toxic debt. Investors – and Bulgarians – enjoy a low corporate and personal tax rate. Major investors also benefit from additional incentives.

Existing investors are amazed by the quality of staff here. Although Bulgaria worries about the low productivity of its workforce (and there are serious issues over education levels for many new entrants to the labour market), foreign investors are able to pick from the cream of Bulgarian employees. Many have post-graduate qualifications and speak two languages or more. Bulgarians have an admirable work ethic: employers (including me) find their Bulgarian staff to be hard-working and to deliver commitments. There are thriving entrepreneurs and start-ups, which I find genuinely inspiring.

Transport links to the UK are excellent. Some days, there are eight direct flights from UK cities to Bulgaria. Within Bulgaria, infrastructure is slowly improving, from a low base. The motorway to Bourgas has made a big difference. Over the next few years, the Greek border and even Varna should come into reach. Train links are being upgraded and Sofia metro expanding.

So far, so good. What is not to like?

I think there are three major issues, all of which might be grouped under the rule of law heading: an unpredictable judicial system; a failure by local and national government to honour contracts and agreements; and, a long-standing failure to take serious action against corruption. I hear about these issues from business leaders as well as from almost all my ambassadorial colleagues, so it is a widespread view.

The judicial system has been the subject of CVM reports for many years, and many think of it as a justice/human rights issue. For me it is also a commercial problem. Put simply, if you cannot quickly and consistently enforce a contract, you cannot easily do business. Indeed, the ideal state is that the rule of law is so consistently enforced, that no-one would dream of avoiding their contractual obligations, as they know that they will not only be compelled to meet them but also pay a financial penalty for wasting the court’s time. In Bulgaria, going to court still takes too long and is too unpredictable.

National and local government should be shining examples of honouring contracts, but sadly there seems to be a tradition in Bulgaria of repudiating all that has been done by your predecessors in office, no matter that legal commitments are entered into. I have seen a few changes in Government and each time I have dealt with British companies that have suddenly seen contracts cancelled, without compensation being paid or work carried out being recompensed. Some companies, who have worked on long-term concessions here, face obstruction as they attempt to exercise legally-binding renewal clauses. The energy industry, and the problems faced by various foreign firms, are widely-reported and put off investment.

Finally, there is the vexed issue of corruption. Although experience of corruption is much lower than its perception, those perceptions are in part driven by a lack of concrete action. In Romania, former mayors, ministers, even a former Prime Minister are in prison; in Bulgaria, even the small fish seem to escape. Not only that, but the bribery laws seem designed to let people escape justice. Why would Bulgaria not choose to have the toughest bribery and corruption laws in the world?

It is not about cash in brown envelopes, which is not normally experienced by foreign businessmen. It is more subtle than that. It is murky public procurement. It is laws or amendments that are proposed to favour a business interest. It is in an ineffective competition commission, which steers clear of certain areas, or regulators at the Bulgarian National Bank who face allegations of incompetence or corruption over KTB. It is the collision of business and politics, whether the short-lived appointment of Delyan Peevski as Head of DANS, or the allegations from the Prosecution about Tsvetan Vassilev using depositors’ money for political and business purposes: it is not good for Bulgaria’s investment image.

These problems do not necessarily outweigh the benefits for investors, but they make the risk/benefit calculation a closer one than is normal in an EU country. It was striking at a meeting with one of Europe’s biggest investment banks earlier this year to hear that Bulgaria is considered a relatively risky operating environment. Yet unlike other conditions for growth, like strong demand in the Eurozone, the solutions lie in the hands of Bulgaria’s institutions and politicians. If they are serious about the economy, they will act.