A Slow Process But Improving: Business & Bureaucracy Financial_Times - 1999/3/8
Two years of stable government, together with a well-publicised effort to crack down on
organised crime, have visibly changed the business environment in Bulgaria.
The "moutri", bull-necked former wrestlers in leather jackets who loitered outside resturants
and shops in Sofia, have vanished. Their employers, Bulgarian insurance companies providing
a cover of legality for protection rackets, were forced to shut down after the government
tightened the regulatory framework for the insurance industry.
Reforms of the customs service and an overhaul of the tax system have helped to reduce the
role in Bulgaria's economy of a half-dozen shadowy conglomerates which dominated business
activity in the mid-1990s. Moreover, the withdrawal of the conglomerates from sectors such
as banking and energy has contributed to a more level playing field for foreign investors.
"The business environment has improved dramatically over the past two years. There are still
problems to be overcome with transparency, with taxation and with the bureaucracy. But in
comparative terms, Bulgaria has become the best place to invest in this region," says John
Munnery, managing director of Mobikom, a partnership between Cable & Wireless of the UK
and BTC, the Bulgarian state telecoms operator which operates Bulgaria's analogue mobile
Much has to be done, however, before Bulgaria can compete effectively with the fast-track
transition countries of central Europe in attracting foreign direct investment.
The privatisation process offers opportunities for making acquisitions in a country with a
skilled workforce and some of the lowest labour costs in eastern Europe. But investors
complain the process is plagued by bureaucratic and legal obstacles, while decision-making by
the privatisation agency which selects purchasers can be painfully slow.
"Approval of a deal by the agency's supervisory board is often delayed for weeks, even
months, after the agency and the buyers have come to an agreement and even initialled a
contract," said a recent report by the Bulgarian International Business Association,
representing foreign investors in the country.
Strategic investors from abroad may be squeezed out by Bulgarian managers who are allowed
to stage management and employee buy-outs on preferential terms.
These permit managers to put up only 10 per cent of the purchase price in cash with the
remainder being paid in instalments over 10 years. "There have been cases of deliberate
sabotage of foreign investors by not treating them fairly during company visits," adds the
The government has included broad-ranging judicial reforms in a series of legislative packages
aimed at gradually bringing Bulgaria's legal system, tax arrangements and public administration
in line with the European Union.
But implementing reform is more difficult, and it will be some time before Bulgarian courts
acquire the confidence and expertise to issue impartial judgments in commercial disputes,
according to one Sofia-based consultant.
Banks, for example, face a long and costly process in foreclosing on collateral pledged to
secure loans because of inefficiency in the legal system, and there is no alternative to court
procedures when it comes to collecting receivables. "Experience has shown that you can't
necessarily collect on collateral, so effectively you are lending without security," says a
Taxation remains complex, with corporate profits effectively taxed at rates above 35 per cent.
The tax system also suffers from idiosyncrasies, such as requiring expatriate employees to
pay tax in Bulgaria on their worldwide income at high rates which reflect the disparity with
local employees' salaries.
While modernising the judiciary and the civil ser vice will help to improve transparency,
Bulgaria, like other east European countries in transition, faces an uphill struggle to root out
corruption in the public administration.
The government has so far made organised crime the focus of its law-and-order campaign,
rather than addressing the issue of corrupt practices in the bureaucracy, according to western
"Unless there is an honest, efficient bureaucracy in place to administer new financial
regulations or a new social services system, for example, new laws and regulations will have
little effect," said Stuart Eizenstat, US assistant secretary of state on a recent visit to Sofia.
"Efforts to root out corruption and eliminate red tape and inefficiencies that inhibit the
growth of small and medium-sized enterprises are also essential."
Ivan Vlahov, spokesman for Coalition 2000, a non-governmental organisation leading an
anti-corruption campaign in Bulgaria, says the public perception is that corruption is
widespread among public officials and largely goes unpunished, but also that such practices
are effective in getting things done.
Liberalising the business environment, through the introduction of simpler procedures, would
reduce the opportunities for corrupt practices among midranking officials, he adds. These
arise from Bulgaria's complex web of procedures for setting up a business and obtaining
permits and operating licences, which businessmen say can sometimes be speeded up by
offering "commissions" to low-paid officials in key posts.
The government's administrative reform programme should also include measures to make
corrupt practices a criminal offence. "Corruption and bureaucracy have always been an
obstacle to foreign investment in Bulgaria. Bureaucrats have to be stopped from
over-regulating and their discretionary powers have to be reduced," says Mr Vlahov.