Doing Business in Bulgaria: Challenges and Opportunities from a Foreign Investors\' Perspective

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Organizer: Internet Securities Inc.

Welcome Remarks: H.E. James Warlick, US Ambassador to Bulgaria

Speaker: Mr. Kenneth Lefkowitz, Managing Partner at New Europe Corporate Advisory

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Doing Business in Bulgaria: Challenges and Opportunities from a Foreign Investors\' Perspective

  1. 1. 27 January 2011 DOING BUSINESS IN BULGARIA Challenges and Opportunities from a Foreign Investors’ PerspectivePresentation by Kenneth Lefkowitz Managing Partner New Europe Corporate Advisory 1
  2. 2. ContentsSection 1 Foreign investors in BulgariaSection 2 ChallengesSection 3 OpportunitiesSection 4 Conclusion 2
  3. 3. Section 1Foreign investors in Bulgaria 3
  4. 4. Overview of FDI in Bulgaria over the years What has been attracting investors so far? • EU membership and harmonizing legislation • Currency board and fixed exchange rate • Growth of domestic consumption • Before the crisis: real estate, retail, tourism • Currently: energy sector€10,000 €5,000 EUR Foreign direct investments GDP per capita billions €8,000 €4,000 €3,000 €6,000 €2,000 €4,000 €1,000 €2,000 €- €- Source: BNB, Unicredit 4
  5. 5. What are the challenges and opportunities aheadChallenges1. Regulatory instability2. Corruption3. Poor institutional infrastructure4. Small marketOpportunities1. European Union and geographic location2. Low taxes3. Labor force 5
  6. 6. Section 2Challenges for foreign investors 6
  7. 7. Challenges to foreign investors#1 Regulatory instability• Lack of a vision and long-term strategic objectives to shape regulation. Laws are dictated mostly by EU, which results in patchwork legislation imposed over outdated texts.• Policy making is often either too general, or incomplete, or not entirely economically justified.• Treatment of foreign investors varies significantly between the different governments, along with the list of “preferred” countries.• Transparency of decision-making is sometimes questioned. It is often unclear how drafts are prepared and why certain revisions have been made.• Communication with interested stakeholders, although improving, has further potential for development. 7
  8. 8. Challenges to foreign investors #2 Corruption • Corruption ultimately destroys value for everyone involved. • Fair-play becomes a competitive disadvantage for certain investors who refuse to bribe. The Foreign Corrupt Practices Act (US) and the Bribery Act (UK) could be devastating to multinationals’ reputations - but they police fair practices where local authorities fail to do so. • No visible improvement in fight against corruption over the last decade. Bribing is perceived as “business as usual”. The longer this mindset remains, the harder it will be to eradicate it. 7.0 6.5 6.0 Estonia Poland 5.5 5.0 Czech Republic Corruption Perceptions Index, as measured by Transparency International. 4.5 Scores range from 0 (most corrupt) to 10 (least corrupt) 4.0 Bulgaria 3.5 3.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Transparency International 8
  9. 9. Challenges to foreign investors#3 Poor institutional infrastructure• Education is unsatisfactory. Local universities provide education that does not satisfy the requirements of the market. Innovation is now mainly imported, not fostered locally.• The legal system is unreliable and too cumbersome to be able to protect well the rights of citizens and businesses.• Physical infrastructure is poorly maintained (although improving) and does not correspond to the needs of the population.• Bureaucratic government apparatus is a challenge for most businesses. Generally, issuing permits, paying taxes, and trading across EU borders are the most problematic areas. Electronic applications and submissions are not used to their full potential. 9
  10. 10. Challenges to foreign investors#4 Small market• Limited physical market – Bulgaria has just 7.5 million inhabitants (and decreasing).• Low purchasing power of the population. Bulgaria is the lowest-wage EU country, with the lowest GDP per capita. This means that introducing new products and services has limited potential. From the perspective of a large foreign investor, the fixed cost of expanding is not always justified for such a small market.• Demographic problems which started from emigration and which a negative birth rate exacerbates further. The population is quickly aging, which additionally shrinks most markets. 10
  11. 11. Section 3Opportunities to foreign investors 11
  12. 12. Opportunities for foreign investors#1 EU and geographic location• European Union candidature and membership have proven invaluable for: • Improving local legislation and administration. • Securing funding for private and public projects that would have otherwise been unavailable. • Reducing customs formalities, which will be completely eliminated with entry in the Schengen area. • Diminishing political and regulatory risks.• Minimal exchange rate risk, due to currency board and promised eurozone membership, is a major advantage over other countries with similar economic profiles.• Geographic location between Turkey and Europe is important both as a transit route and as a potential for future growth. Bulgaria is likely to benefit in the mid to long term from Turkey’s growth. Bulgaria is also important for the development of the Balkan countries. 12
  13. 13. Opportunities for foreign investors#2 Labour force• Well-educated generation Y workforce. Much of the population born after 1980 has gone to study abroad for higher education. The combination of visa requirements and economic crisis has urged many of them to come back. This workforce is usually flexible, multilingual, and is available for a fraction of the cost of their counterparties in EU15.• Language skills are usually strong among all age groups of the urban population.• Strong legacy in mathematical fields. Bulgarians deservedly have an excellent reputation in subjects such as mathematics, engineering, and information technology. This has resulted in many firms setting up outsourcing centers in Bulgaria.• Low costs of employment. Bulgaria has the lowest nominal wages among EU 27. Laws also mandate low health security contribution and a modest employer contribution to social security. 13
  14. 14. Opportunities for foreign investors #3 Low tax rates • Corporate income tax of just 10%, or 0% in areas with high unemployment. • Personal income tax of 10% • VAT exemption of 2 years for imports of equipment for investment projects over € 5 million, creating at least 50 jobs • Depreciation of 2 years for computers and new manufacturing equipment • Opportunity to write-off R&D expenditures • 5% withholding tax on dividends and liquidation quotas (0% for EU tax residents ) • No restrictions on after-tax repatriation of profits • Few taxes were raised during the crisis, unlike in neighboring Romania and Greece.Source: Invest Bulgaria Agency 14
  15. 15. Section 4Conclusion 15
  16. 16. Doing Business in Bulgaria: Challenges and opportunities from Foreign Investors’ PerspectiveConclusionUnfortunately, challenges remain because:• Regulatory framework remains largely fluid and unpredictable.• Corruption is rampant in all areas of life and perceived as something normal.• Institutions are in most cases weak and fail to protect or educate its citizens• Bulgaria is a tiny country with aging population, which results in a very small market for most productsBut on the bright side, opportunities come from:• European Union membership, which promises constant improvement of legislation, a common currency, facilitated border control, and free movement of capitals.• One of the most favorable tax regimes in Europe• Labor force, which is often well skilled, multilingual, foreign- educated, and comes cheap. 16
  17. 17. Thank you for your attentionQuestions?KENNETH LEFKOWITZManaging PartnerNew Europe Corporate Advisory Ltd.9 Narodno Sabranie Square, Sofia 1000, Bulgariatel.: +359 (2) 988-7390mob.: + 359 888 637-053fax: +359 (2) 981-6206web: www.necadvisory.come-mail: kenneth.lefkowitz@necadvisory.com 17

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