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Stagnation or progress of SME in Bulgaria from the point of view of the Foreign Investment

Stagnation or progress of SME in Bulgaria from the point of view of the Foreign Investment. Vladimir Penkov Executive Managing Partner of Penkov, Markov and Partners a nd Vice-President of the Bulgarian Chamber of Commerce and Industry. No. 1. ECONOMIC ENVIRONMENT М ACROECONOMIC ENVIRONMENT.

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Stagnation or progress of SME in Bulgaria from the point of view of the Foreign Investment

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  1. Stagnation or progress of SME in Bulgaria from the point of view of the Foreign Investment Vladimir Penkov Executive Managing Partner of Penkov, Markov and Partners and Vice-President of the Bulgarian Chamber of Commerce and Industry Penkov, Markov & Partners Attorneys at Law

  2. No. 1 ECONOMIC ENVIRONMENTМACROECONOMIC ENVIRONMENT • STABLE RISE OF GDP IN EXCESS OF 5% ANNUALLY • DEVELOPMENT OF LABOUR MARKET AND REVENUE • RISING NUMBER OF EMPLOYED UNDER LABOUR AND OFFICIAL CONTRACT • CONSIDERABLE IMPROVEMENT OF UNEMPLOYMENT RATE • STILL LOW INCOME LEVEL • STABLE INFLATION RATE Penkov, Markov & Partners Attorneys at Law * Source – see last page

  3. No. 2 GROSS DOMESTIC PRODUCT 42 GDP in BGN mln 5,5% Penkov, Markov & Partners Attorneys at Law * Source – see last page

  4. No. 3 Economically active population (mln persons) Penkov, Markov & Partners Attorneys at Law * Source – see last page

  5. No. 4 Average annual inflation 5 % Penkov, Markov & Partners Attorneys at Law * Source – see last page

  6. No. 5-1 Balance of payment (as compared to GDP) 7,5 Penkov, Markov & Partners Attorneys at Law * Source – see last page

  7. No. 5-2 Trade in mln US dollars Penkov, Markov & Partners Attorneys at Law * Source – see last page

  8. No. 6 2. DEVELOPMENT STRATEGYNATIONAL POLICY FOR DEVELOPMENT OF SME • SME AGENCY • SME ACT • STATUTORY PROVIDED PREFERENCES FOR SME • NATIONAL STRATEGY FOR DEVELOPMENT OF SME IN THE 2002-2006 PERIOD • ACCESSION OF BULGARIA TO THE EUROPEAN CHARTER FOR SME • EASIER CREDIT EXTENSION Penkov, Markov & Partners Attorneys at Law * Source – see last page

  9. No. 7 SME DEVELOPMENT STRATEGY • SIMPLIFICATION OF ADMINISTRATIVE ENVIRONMENT • ONE-STOP SHOP SERVICE • TACIT AGREEMENT • IMPROVEMENT OF FINANCIAL ENVIRONMENT • ENCOURAGEMENT OF INNOVATION AND TECHNICAL PROGRESS • EUROPEANIZATION AND INTERNATIONALISATION OF SME – (SUBCONTRACTOR NETWORK) • IMPROVED ACCESS TO INFORMATION SERVICES • ENCOURAGEMENT OF ENTREPRENEURIAL SPIRIT • TAX PROVISIONS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  10. No. 8 SME INFORMATION SUPPLY • EASIER ACCESS TO INTERNET - LOW PRICES AND ALTERNATIVE OPPORTUNITIES FOR NETWORK CONNECTION • E-GOVERNMENT • INFORMATION AND CONSULTATIONS FROM ORGANIZATIONS INDEPENDENT OF THE GOVERNMENT • SPECIAL INTERNET PORTALS IN SUPPORT OF BUISNESS - OPPORTUNITIES FOR FREE INFORMATION AND ADVERTISEMENT • INTRODUCTION OF ELECTRONIC DOCUMENT AND ELECTRONIC SIGNATURE Penkov, Markov & Partners Attorneys at Law * Source – see last page

  11. No. 9 IMPORTANCE OF SME FOR THE BULGARIAN ECONOMY • INCREASING SHARE IN GDP • SHARE IN THE GENERATION OF ADDED VALUE • GENERATOR OF EMPLOYMENT OPPORTUNITY • INCREASED LABOUR PRODUCTIVITY • RELATIVELY SMALLER SHARE IN FOREIGN DIRECT INVESTMENT Penkov, Markov & Partners Attorneys at Law * Source – see last page

  12. No. 10-1 RELATIVE SHARE OF DIFFERENT SME TYPE BY NUMBER OF EMPLOYED Penkov, Markov & Partners Attorneys at Law * Source – see last page

  13. No. 10-2 ELECTRONIC READINESS OF BULGARIA Penkov, Markov & Partners Attorneys at Law * Source – see last page

  14. No. 11 Employment situation (in mln persons) Penkov, Markov & Partners Attorneys at Law * Source - see last page

  15. No. 12 Foreign debts in EUR 12,5 6,5 6 Penkov, Markov & Partners Attorneys at Law * Source - see last page

  16. No. 13 Currency reserves at the National Bank in EUR and BGN 12 6 Penkov, Markov & Partners Attorneys at Law * Source - see last page

  17. No. 14 CREDIT RATING - ACHIEVEMENT OF INVESTMENT RATING - LEVELS Penkov, Markov & Partners Attorneys at Law * Source - see last page

  18. No. 15 BANK FINANCING OF SME • GROWING INTEREST OF BANKS IN CREDITING SME • EXHAUSTION OF LARGE CREDIT OPPORTUNITIES • GROWING INTEREST IN THE VERY SME • IMPROVED QUALITY OF INVESTMENT PROJECTS • EXPANSION OF MANAGEMENT SKILLS • ABOUT HALF AND MORE OF THE SHORT-TERM AND LONG-TERM CREDITS IN 2004 WERE EXTENDED TO SME • BANK FINANCING – STILL INSUFFICIENT COVEREAGE OF SME NEEDS OF FUNDS Penkov, Markov & Partners Attorneys at Law * Source - see last page

  19. No. 16 Bank Credits for SME • In the2001-2004 period larger Bulgarian banks extendedmore than 46,000 credits to SMEs to the total value of more than BGN 2.0 billion (this figure does not include the credits of some large banks such as Bulbank, Post Bank and DSK) • BNB - change of policy as regards the restriction of credit extension 1200 Penkov, Markov & Partners Attorneys at Law * Source - see last page

  20. No. 17 Deposits and credits measured by GDP - dynamics 72% 65% 53% 43% 40% 32% Penkov, Markov & Partners Attorneys at Law * Source – see last page

  21. No. 18-1 PARTICIPATION OF SME IN PUBLIC PROCUREMENT - 1 • RELATIVELY SMALLER SHARE OF PARTICIPATING IN PROCEDURES ON AWARDING UNDER THE PUBLIC PROCUREMENT ACT (PPA) • RELATIVELY SUCCESSFUL EXECUTIONS OF CONDITIONS UNDER PPA BY SME • PREFERENCES UNDER PPA - VALID UNTIL 2007 Penkov, Markov & Partners Attorneys at Law * Source – see last page

  22. No. 18-2 PARTICIPATION OF SME IN PUBLIC PROCUREMENT - 2 • OBSTACLES FOR SME PARTICIPATION IN AWARD PROCEDURES UNDER THE PUBLIC PROCUREMENT ACT (PPA) • ENORMOUS NUMBER OF DOCUMENTS TO PRESENT AND LACK OF QUALIFIED STAFF TO PREPARE THEM • HIGH GUARANTEES FOR PARTICIPATION AND EXECUTION • SHORT TERMS FOR PREPARATION • INSUFFICIENT PRECISION IN FORMAULATION OF CONDITIONS FOR PARTICIPATION • INEQUALITY FROM THE POINT OF VIEW OF THE VAT ACT AS COMPARED TO FOREIGN INVESTMENTS • LACKING SUBCONTRACTOR NETWORK Penkov, Markov & Partners Attorneys at Law * Source – see last page

  23. No. 19 Unemployment, average annual 11% Penkov, Markov & Partners Attorneys at Law * Source – see last page

  24. No. 20 Revenue Penkov, Markov & Partners Attorneys at Law * Source – see last page

  25. No. 21 Savings in % compared to GDP 26 Penkov, Markov & Partners Attorneys at Law * Source – see last page

  26. No. 22-1 FACTORS OF STABILITY AND ENCOURAGEMENT - 1 • POLITICAL STABILITY - NATO MEMBERSHIP, EXPECTED EU ACCESSION – 2007 (SIGNING OF THE ACCESSION TREATY ON APRIL 25, 2005) • FINANCIAL STABILITY • CURRENCY BOARD • WELL-EXPRESSED LEGAL BASIS (COMPANY LAW, TAX LAW, COMMERCIAL AND CONTRACTUAL LAW, COMPETITION LAW, CURRENCY AND CUSTOMS LAW, LABOUR LAW) • LIBERAL PROVISIONS FOR FOREIGN TRADE • LAND OWNERSHIP • LEGAL GUARANTEES (MORTGAGE, MORTAGE LENDING LAW) Penkov, Markov & Partners Attorneys at Law * Source – see last page

  27. No. 22-2 FACTORS OF STABILITY AND ENCOURAGEMENT - 2 • INTERNATIONAL ACCORD PRIORITIES • DEVELOPED PRIVATIZED BANKING SYSTEM • LIBERAL CURRENCY PROVISIONS AND FREE TRANSFER OF PROFIT • GOOD HUMAN POTENTIAL • IRREVERSIBILITY OF CONDITIONS OF FREE MARKET ECONOMY • THE EU REPORT OF OCTOBER 2002 ESTABLISHED THAT THERE WAS A FUNCTIONING MARKET ECONOMY IN BULGARIA Penkov, Markov & Partners Attorneys at Law * Source – see last page

  28. No. 23-1 PROBLEMS THAT BULGARIA SHOULD SOLVE - 1 • UNEMPLOYMENT AT ABOUT 450 000 OR 12 PER CENT, BUTSOME 300 000 LATENT UNEMPLOYED • SHADOW ECONOMY ESTIMATED AT ABOUT 40-50 % • PRIVATISATION IN THE INFRASTRUCTURE AREA TOO SLOW • THE INVESTMENT CLIMATE IS STILL IN THE PROCESS OF DEVELOPMENT (THE TAX SYSTEM HAS TO ENCOURAGE THE COMPETITIVENESS OF THE ECONOMY MORE INTENSELY) • UNSATISFACTORY CONDITIONS FOR CREDITS ON SITE (INTEREST RATE AT 10 – 12%) Penkov, Markov & Partners Attorneys at Law * Source – see last page

  29. No. 23-2 PROBLEMS THAT BULGARIA SHOULD SOLVE - 2 • NOT UNIFIED JUDICIAL PRACTICE IN THE FIELD OF COMMERCIAL AND COMPANY LAW, SLOW JUDICIAL PROCEDURES • SLOW TRANSFORMATION OF JUDICIAL DECISIONS • INSUFFICIENT PROGRESS IN THE FINANCIAL SECTOR • MANY PERMITS, PLENTY OF BUREAUCRACY • CORRUPTION AND CRIME • INSUFFICIENT TRANSPARENCY WITH LARGE PROJECTS • LACK OF PROJECTS FOR ABSORBTION OF EUROPEAN FUNDS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  30. No. 24-1 A VIEW OF PROTECTION OF FOREIGN INVESTMENTS - 1 • Inviolability of private property stated by the Constitution • Well-expressed general mortgage insurance law • Supremacy of international accords and agreements • Only strictly regulated cases of property confiscation under condition of full compensation; opportunities for legal defence • EU citizens may acquire land ownership; Penkov, Markov & Partners Attorneys at Law * Source – see last page

  31. No. 24-2 A VIEW OF PROTECTION OF FOREIGN INVESTMENTS - 2 • Legally provided right to free investment and commercial activity • Equality of foreign investments • Free transfer of profit • Preserving property until full payment of price is legally permitted • Foreigners may be appointed managers without limitation Penkov, Markov & Partners Attorneys at Law * Source – see last page

  32. No. 25-1 TYPES OF SPECIAL PLEDGES AND GUARANTEES USED IN PRACTICE - 1 • PLEDGE OF WHOLE ENTERPRISES • PLEDGE OF SHARES IN LIMITED LIABILITY COMMERCIAL COMPANIES • PLEDGE OF SHARES IN JOINT-STOCK COMPANIES • PLEDGE OF MATERIAL ASSETS • raw materials, materials, goods, produce under production • PLEDGE OF RECEIVABLES • Contractual receivables, receivables on shares, receivables on bank accounts Penkov, Markov & Partners Attorneys at Law * Source – see last page

  33. No. 25-2 TYPES OF SPECIAL PLEDGES AND GUARANTEES USED IN PRACTICE - 2 • PLEDGE OF FUTURE RECEIVABLES • NORMAL MORTGAGE LAW • MORTGAGES • RISK INSURANCE POLICY • THE SPECIAL PLEDGE IS REGISTERED IN A UNIFORM, TRANSPARENT CENTRAL REGISTER WITH THE MINISTRY OF JUSTICE • THE SPECIAL PLEDGE LAW PERMITS DIRECT EXECUTION WITHOUT THE TIME-CONSUMING COURT TRIALS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  34. No. 26 LUCRATIVE TAX PROVISIONS • 15% COPORATE TAX WITH A TREND TO DROP IN THE NEXT TWO YEARS TO 10 -12.5 % • 20% VAT WITH A TREND TO DROP TO 18 % • REDUCTION OF AMMORTIZATION TERMS TO 2 YEARS • ALL OR PART OF THE COSTS ARE EXPECTED TO BE RECOGNIZED AS INVESTMENTS • ALL INVESTMENTS UP TOBGN 500 ARE CONSIDERED COSTS • TAX PREFERENCES FOR OPENING NEW JOBS • PREFERENCES FOR SPARSELY POPULATED REGIONS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  35. No. 27-1 Direct foreign and Bulgarian investments in EUR mln Penkov, Markov & Partners Attorneys at Law * Source – see last page

  36. No. 27-2 Foreign direct investments in mln US dollars Total 1992-2005 • Austria– 1666 • Greece – 1034 • Netherlands – 928 • Germany – 915 • Italy – 716 2004 • Austria– 927 • Czech Republic – 376 • Netherlands – 341 • Germany – 252 • Greece - 157 Penkov, Markov & Partners Attorneys at Law * Source – see last page

  37. No. 28-1 Foreign direct investment and total capital formation in mln US dollars Penkov, Markov & Partners Attorneys at Law * Source – see last page

  38. No. 28-2 Foreign direct investments in % of GDP Penkov, Markov & Partners Attorneys at Law * Source – see last page

  39. No. 29 GOOD CONDITIONS FOR DEVELOPMENT OF JOINT SME VENTURES WITH FOREIGN COMPANIES • HIGH GROWTH PERCENTAGE AROUND 5 % • LOW INFLATION • NUMEROUS MARKET NICHES • GOOD LINKS ON LAND, BY SEA AND AIR • 15 % CORPORATE TAX - WITH A TREND TO REDUCE • WELL-EDUCATED SPECIALISTS • LOW LEVEL OF SALARIES • UP TO 2007 PREFERENCES FOR PUBLIC PROCUREMENT • IN SOME REGIONS - PREFERENCES AND STATE SUPPORT • AMENDMENTS WERE PASSED TO THE BULGARIAN CONSTITUTION ALLOWING THE ACQUISITION OF LAND BY FOREIGNERS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  40. No. 30-1 Workforce costs (USD) Penkov, Markov & Partners Attorneys at Law * Source – see last page

  41. No. 30-2 Average hourly wage in USD 6,52 5,73 4,92 4,6 3,99 3,51 1,34 1,03 Penkov, Markov & Partners Attorneys at Law * Source – see last page

  42. No. 31 PROBLEMS • FUNDS • MARKETS • GOOD CREDIT CONDITIONS • SHADOW ECONOMY – ABOUT 40 – 50 % • TRANSFER OF TECHNOLOGIES • LACKING SUBCONTRACTOR NETWORK FOR INFRASTRUCTURE PROJECTS AND OTHER LARGER SUPPLY PROJECTS • INFORMATION ABOUT CRITERIA OF INTERNATIONAL FINANCIAL PROJECTS • TRAINING (MANAGERS, BUSINESS ECONOMY) • BUREAUCRACY AND TOO MANY PERMITS • COMPETITIVENESS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  43. No. 32-1 PROJECTS FOR ENCOURAGEMENT OF JOINT SME - 1 • ACTIVATION OF JOINT VENTURES AS THE EFFICIENCY OF THESE COMPANIES DOUBLES FROM THE VERY FACT OF BETTER ORGANIZATION AND MANAGEMENT • PARTICIPATION OF JOINT VENTURES IN INFRASTRUCTURE AND OTHER MAJOR PROJECTS AS SUBCONTRACTORS • TRAINING OF MANAGERIAL STAFF AT MEDIUM AND TOP LEVEL - USE OF PROVIDED FUNDS • SUPPORT OF FOREIGN CONSULTANTS AND ENTREPRENEURS FOR ESTABLISHMENT OF CONDITIONS FOR PARTICIPATION OF BULGARIAN COMPANIES, AS WELL AS WITH FOREIGN PARTICIPATION IN THE EU FINANCIAL PROJECTS Penkov, Markov & Partners Attorneys at Law * Source – see last page

  44. No. 32-2 PROJECTS FOR ENCOURAGEMENT OF JOINT SME - 2 • SUPPORT FOR DEVELOPMENT OF DATABASES AND DRAFT OF BUSINESS PLANS FOR EXTENSION OF CREDITS • ENCOURAGEMENT OF GROWTH AND ENHANCEMENT OF COMPETITIVENESS OF SME BY EXPANSION OF SPECIALISATION AND TRANSFER OF TECHNOLOGIES FROM ABROAD • ENCOURAGEMENT OF ENTREPRENEURSHIP BY TRAINING AND IMPROVING THE BUSINESS CLIMATE FOR PRIVATE ENTERPRISES • IMPROVEMENT OF OPPORTUNITIES OF SME ACCESS TO SERVICES, PROGRAMMES, NETWORKS AND FINANCIAL SOURCES OF THE EU Penkov, Markov & Partners Attorneys at Law * Source – see last page

  45. This report is based on data of the National Statistical Institute, the Small and Medium-sized Enterprises Agency, the Bulgarian National Bank, the International Monetary Fund, the Bulgarian Investment Agency, the Ministry of Labour and Social Policy, the Ministry of Economy, the Bulgarian Chamber of Commerce and Industry and various commercial banks.The data for 2004 has not been finally confirmed by the National Statistical Institute, at which we have only forecast data for 2005. This report constitutes the author’s own analysis and does not thereby bind any institution. Penkov, Markov & Partners Attorneys at Law

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