InvestBulgaria Agency Director Borislav Stefanov: Foreign Investors Have Started to Believe Bulgaria Stands Out in Its RegionInvestPolicies |Author: Ivan Dikov | February 26, 2012, Sunday // 12:02| views
An exclusive interview with Mr. Borislav Stefanov, Executive Director of the InvestBulgaria Agency, for the "Investors of the Decade" Business Survey of Novinite.com (Sofia News Agency) and Novinite.bg.
From your point of view how did Bulgaria do in terms of attracting foreign direct investment in 2011?
If we are to judge solely by the figures, 2011 was not a good year for investments not only for Bulgaria but also globally and for our part of the world. On the one hand, that is normal since the financial and economic crisis has not been overcome yet. Apparently, it is even worsening in some countries.
Foreign investment is very dependent on the situation in one's home country – if your own economy is facing difficulties, it can hardly be expected that you would be thinking of new foreign investments. To some extent, this makes investments a lagging indicator of the economy – unlike other indicators such as construction which reflect the economy's immediate state.
On the other hand, if we leave statistics and theory aside, last year the InvestBulgaria Agency had a lot of investment inquiries by foreign companies. There were about 170 foreign firms that we worked with in 2011, which is more than the annual number of inquires in the past years.
Of course, many of those are interested in initial information because it takes a while to transfer manufacturing operations or build a new factory, or open a new office in the services sector. But apparently these firms are interested in Bulgaria.
We also had about 20-30 cases of more specific interest in which the respective companies are choosing from amoung 3-4 countries, Bulgaria included, as investment locations. I am optimistic that many of these projects can be realized in the next 1-2 years.
According to the data of the Bulgarian National Bank (BNB), Bulgaria got EUR 700 M in FDI in the first 11 months of 2011. How is this figure going to change when the final data is available?
I think there will be a substantial correction of this figure. If we go back to the same situation last year – everybody was talking about a decline of FDI in Bulgaria since the figure for the first 11 months was EUR 894 M. Later it turned out that it is in fact EUR 1.4 B so I think that the 2011 figure will also be corrected, and will surpass EUR 1 B once the final data is ready.
What usually happens in cases like this is that everybody raises alarm about a decline in the FDI when the incomplete data becomes available but several months later when the final data is there it usually doesn't get much attention.
What are the (new) trends that you see looking at the structure of Bulgaria's recent FDI?
Interestingly, at a first glance the latest figures to some extent disprove some of my earlier claims that finance, trade, and real estate have not played a major role in Bulgaria's investments for the past 3-4 years. If we look at the BNB data it seems that they did play a role in foreign investment in 2011.
At a first glance, it also seems that industry had little investment in 2011, which also seems to contradict with my claims that its relative role is growing. But all of that is at a first glance.
Finance, trade, and real estate indeed had a better performance in 2011 than they did in 2010.
On the one hand, the decline of banking sector investments is continuing but as a whole banking institutions in Bulgaria got a little over EUR 100 M in investments in 2011, which is a substantial figure. Leasing firms continue to "export" funds but to a lesser extent than they did in 2010.
The construction and real estate sectors are still declining – even though construction is declining a little faster, and real estate – a little more slowly.
It is interesting that it seems industry had much smaller investments in 2011 than in earlier years. One of the main reasons for that is the fact that some of the major industrial producers in Bulgaria repaid inter-company loans last year, which by the rules of the statistical methodology – e.g. if a company repays EUR 200 M to its parent company – counts as negative investments, which are subtracted from the total.
In Bulgaria's case last year the two largest credits repaid to parent companies come from the processing industry and because of them it seems as though Bulgaria's FDI in industry declined by EUR 400 M. And these two are not the only ones that repaid credits to parent companies last year.
This is the major reason industrial investment seems smaller; other than that, there is hardly any difference compared with 2010 and the prior years.
Industry is a sector in which FDI in Bulgaria has been relatively stable in the past 10 years unlike finance, trade, and real estate.
It seems somewhat suprising that according to the statistics, Bulgaria's sector with the highest FDI in 2011 was telecommunications with almost EUR 300 M – almost half of the EUR 740 M for the first 11 months. This is the sector's best result since 2006, which is a good sign.
Would you care to reveal some of the investment inquiries that you mentioned, and which can be expected to come to Bulgaria?
Indeed, the InvestBulgaria Agency had very interesting investment inquiries in 2011 – starting from projects for building hospitals and medical facilities for foreign citizens that would utilize Bulgaria's medical staff and nature, going through the manufacturing of fire trucks and ambulances, all the way to a company which is a major supplier of wooden toys for schools and kindergartens in Western Europe.
Of those that seem to be the closest to realization, a company in the outsourcing sector has already decided to come to Bulgaria but they haven't announced their decision yet. It was made in October but they decided to make it public a month before they actually start their operations in Bulgaria. That is why I won't mention any names or countries but this will be an investment into a large outsourcing services center in the field of accounting and financial services. They intend to start with a staff of 200-300 and to reach several hundred employees.
Other than that, there are several major projects in which the firms have set the first or second quarter of 2012 as deadlines for selecting an investment destination with Bulgaria being a major option.
There is another outsourcing project – but in business processes – where the investor is selecting from among Bulgaria, Romania, Ukraine, Poland, and the Czech Republic. There are also several industry projects – in the chemical industry and the machine-building sector. In the first case, the company is picking from among several countries in Bulgaria's region. It will be a EUR 70 M investment into a plant with 300 workers – and Bulgaria does seem in good standing when it comes to the investor's requirements – low operation costs, macroeconomic stability, etc.
Actually, the one thing that is probably a hurdle for Bulgaria in such large-scale industrial projects is that very often the investors get their supplies from Central and Western Europe, and their markets are there, too. So if it is a German company with its supplies and clients in Germany and France, the distance would be several hundred kilometers in both directions if it sets its factory in the Czech Republic. If it comes to Bulgaria, the distance will be 3 000 km, which means additional transportation costs.
On the other hand, however, Bulgaria is in a very good standing – including from what we understand from the investors themselves – with respect to the other requirements so we have reasons to believe that it will be attractive for FDI.
Also, there are several projects in transport and logistics so I think that when it comes to announcing new investment projects 2012 will be better than 2011 because in 2011 we had a lot of activity going on but only a couple of these firms announced their decisions to come to Bulgaria.
In early 2012, what are Bulgaria's arguments for attracting investors? Why should a foreign investor choose Bulgaria?
The arguments for that have simultaneously remained the same, and have evolved. Bulgaria has had competitive costs and taxation, and macroeconomic and political stability for a while but the difference now is that people in Europe have finally started to believe that the figures and data we provide are real, that Bulgaria's good macroeconomic standing is real. A good indicator is the fact that in 2010 Bulgaria was the only country in Europe whose credit rating was upgraded by Moody's.
Now this is something that everybody understands. Earlier much attention was paid to what we said, whereas now many of the potential investors that we talk to are aware that Bulgaria has some of the lowest public debt and lowest budget deficit in the European Union.
These facts are important because even though no firm picks a country solely because of its macroeconomic stability, they are guarantees that the cost of the other factors that are important – price of land, labor costs, taxation – will not change quickly. Because, for example, if a country has low resource prices but inflation is very high, these prices are expected to go up at some point.
In the past 1-2 years, almost all countries in Bulgaria's region have had either a debt, or a deficit problem, and have thus decided to resort to raising taxes such as VAT while none of that is going on in Bulgaria. So people have started to believe that Bulgaria is not just one of the countries from the region but it does have crucial macroeconomic advantages, which is important.
As to Bulgaria's other advantages – for example, when it comes to labor resources in the outsourcing sector many firms have told us that Bulgaria's education system – no matter how much we criticize it – actually produces very well trained language specialists, which is hard to find even in much larger countries. For example, Romania has a lot of French speakers as a percentage of the population but on the other hand it is harder to find German speakers there, not to mention speakers of Scandinavian languages. A country such as Hungary is the opposite – it has a lot of German speakers but fewer French speakers.
Bulgaria has a very good foreign language balance whether that is due to its foreign language high schools or the language majors in universities. In all outsourcing activities – IT, financial services, or other business processes – it is relatively easier to find people with various foreign language skills in Bulgaria than in other countries.
Bulgaria also has advantages in industry and manufacturing, agriculture, and other sectors since as a whole it has a very good balance between labor cost and quality.
Often, there examples of lower labor productivity in Bulgaria that are cited in comparison to some other states but this is somewhat of an "egg or chicken" question because labor productivity is also a statistical tool which is used for economic analysis but it reflects the value added figure divided by the time for producing a certain product. Thus, if a haircut costs BGN 10 in Bulgaria and EUR 20 in Germany, this does not make the German stylist four times more productive – it is because the price there is higher given similar costs.
Or at least, the difference in labor productivity is not so great. So to the extent that the Bulgarian economy is primarily service-based, the fact that labor costs, i.e. service prices here are low sometimes affects negatively the labor productivity estimates.
Other advantages that Bulgaria has are also important – for example, the geographic location. Its value depends on the respective industry and company. Let's say a firm wants to service both the EU and Turkey, a very fast-growing market. In that case Bulgaria has a very good location. If Germany is your primary market, then, naturally Poland, the Czech Republic, and Hungary would have a more strategic location.
What about the state incentives for foreign investors stipulated in the Bulgarian legislation?
State incentives for new investors are important and even though Bulgaria is offering a lot to foreign investors, there are some more things that can be done.
Basically, the incentives that Bulgaria offers to foreign and domestic investors are similar to those in other countries in the region. The Bulgarian Investment Encouragement Act was drafted to be similar to legislation in the Czech Republic, Hungary, etc. But all of that is still important because if we offered no incentives, at the end of the day, companies have to choose from among 3-4 countries, and every single factor counts.
How do you plan to amend Bulgaria's investment legislation to stimulate the investors?
When it comes to a state stimulus for investors, we need to pay more attention to what companies are indeed looking for in Bulgaria. In my view, one of the shortcomings of the existing legislation has been that it provides incentives that were important before the economic crisis.
These measures include purchasing state land without a tender, receiving infrastructure support, and the opportunity to get funding for staff training. I don't wish to disparage these incentives, they are very important. For companies looking for that – land and infrastructure can turn out to be important advantages.
On the other hand, companies in the services sector are not so interested in land and infrastructure; what they usually assume is being able to move right away into some of the existing Class A office buildings that have all necessary infrastructure anyway. So the incentives we have now can hardly influence the decisions of these companies.
What is more, even when it comes to industrial production, transport, and logistics, a number of industrial sites have already been developed in Bulgaria in the recent years and their prices aren't that high which can save time when starting new operations.
Staff training is very important. Of course, each new investor trains its employees but they don't come to Bulgaria with the idea to start training their people from scratch. Training funding can be a plus but they expect to have qualified labor they can use. So they can be training them additionally in the first 4-5 years, and we can support that but this is not a crucial incentive.
The changes we plan to include in the amended Investment Encouragement Act will provide for funding the costs for the creation of new jobs.
Currently, the Investment Act, EU programs, and various measures of the Bulgarian Labor Ministry and Employment Agency can support the creation of new jobs but in most cases they focus on hiring unemployed people (which is very important obviously because it reduces the unemployment in the country) but in many cases the investors that come to Bulgaria, at least at the beginning, are looking for highly qualified specialists who clearly aren't unemployed.
Thus, in most cases these measures are either inapplicable to them, or if the newly hired employees are highly qualified but have been unemployed, the state does not refund much of the cost for the creation the new jobs. So these measures exist but they are not so attractive for potential investors. What we would like to do is something similar to other countries in the region which pay a fixed sum for each new job. For example, Serbia can pay between EUR 2000 and EUR 10 000 for any new job in the industry sector depending on the respective field and geographic region. Hungary, the Czech Republic, and Slovakia have similar measures.
What we deem to be a better option instead of paying a fixed sum - since often there are discrepancies between what is initially announced as an investment and the situation 2-3 years later – is to refund some of the labor costs. One option is to refund some of the social security and health insurance costs which make up a substantial share of investors' expenses. They reflect actual spending and it would be good for the state to refund something that has already been paid.
We are also considering other measures. In fact, we rely on the help of the investors themselves and the firms working with investors because we get feedback from companies working in Bulgaria on whether they took advantage of the legislative incentives or not.
One of the problems here is that when it comes to discussing measures to attract investors, the discussion suddenly moves from something specific to something abstract.
It is very easy to say that the business environment is what needs to be fixed in order to attract investors. This is certainly the case. Of two countries with similar indicators, the one with a better business environment will attract more investors. One the other hand, there is no way of stipulating in the Investment Encouragement Act that the business climate has to be good. This is unrealistic. What can be done is to stipulate specific measures – if the investors need to be stimulated on A, B, and C, the law needs to provide these specific incentives. If the investors have an issue with some institution or a procedure, this can be fixed too, but things need to be specific.
How does the Bulgarian government stimulate investment and employment in the Bulgarian provinces, which suffer substantially from the economic imbalances in the country?
We are always trying to direct investors outside of Sofia and the bigger cities – not because we don't like Sofia but because there are already a number of major investment projects that have been realized there.
From a legislative point of view, investments in municipalities whose unemployment rate is above the average get easier investor certification and the respective benefits, and can be exempt from corporate taxes so there are many ways to stimulate investments in these municipalities.
This is hard for the outsourcing investments because if a company is looking to hire quickly 500 computer literate persons who speak English and German, that can hardly be done outside the bigger cities.
It is easier for industrial investments even though one of the things that many investors prefer is being close to a large international airport. At the same time, however, Bulgaria is not so large and any location is within a few hours' drive from an airport.
Why does Bulgaria seem to be failing to make a breakthrough with investments from East Asia – China, Japan, South Korea?
That is a very good question. On the one hand, I don't think Bulgaria has managed to present itself in East Asia as an investment destination. We are known as an investment destination in our own part of the world but for the Chinese, Japanese, and Koreans Bulgaria is still a country with roses and yogurt. Not much has been done in order to distinguish Bulgaria from Hungary, for example, the difference in the perceptions currently being that the latter doesn't have roses and yogurt – but in the minds of the East Asian investors there isn't anything that sets Bulgaria apart from its region when it comes to doing business.
To a certain extent, this is where we are going to play a role, and I am very happy that in 2012 the InvestBulgaria Agency is going to organize several investment forums in China, Japan and Korea with funding from EU Operational Program "Competitiveness", where we will present Bulgaria, and more specifically some sectors in which we would like to attract investors. Right now, the problem is that all investors coming from that region are interested in renewable energy – which is not bad in itself but our priorities focus on processing industry and high value added services such as IT and telecommunications.
So having a better marketing will certainly help. We are now developing promotional materials for Bulgaria, in which we are trying to present various priority sectors – machine-building, electronics, engineering, chemical industry, energy, food industry. These brochures are the first to be issued by the Bulgarian government in a long time.
They are actually the first ones telling investors to come to do business in Bulgaria in specific spheres. In order to draft them, we met with many of the big companies in Bulgaria so that we can present Bulgaria's potential from a business viewpoint. Over the next three years, these brochures will be translated in 10 languages – we will start with 7 languages and will add some more so that the brochures about the Bulgarian machine-building sector that are distributed in Korea can be provided in Korean.
This will certainly increase the awareness about Bulgaria – which is one of the important factors.
One thing that has made an impression on me in the past few years is that many of the potential investors from China operate in a scale that is hard to be achieved in Bulgaria. For example, they might seek several hundred thousand decares of land for agricultural projects – which is hard for the Bulgarian state to provide. There are private funds which already have major land assets but 500 000-700 000 decares is a considerable amount even for them.
On the other hand, I am very optimistic about the manufacturing sector – with the new car factory of Litex Motors and Great Wall Motor opened in Bulgaria's Lovech. Even though the funding there is Bulgarian, the cooperation with the Chinese partners is very serious, the equipment and the know-how are from China. So I am convinced that this factory will attract a lot of suppliers and subcontractors because the auto industry usually achieves very good clustering.
The Litex Motors and Great Wall Motor project will certainly help to raise the interest in Bulgaria of many Chinese manufacturers because until now we did not have much that we could show in terms of East Asian investments. The only big producer from Korea here is Hyundai, the best example of a Japanese investment in Bulgaria is Yazaki, and until the opening of the Great Wall factory in Lovech we had no major Chinese manufacturing investments in Bulgaria. So the Litex Motors plant is a successful example.
Another thing that makes me optimistic is Bulgaria's recent recognizing of the Schengen visas which will help many businesspeople from more distant destinations to come to Bulgaria because in the recent years we had many cases in which firms said Chinese businessmen would like to come to Bulgaria but don't because of the slow visa process. This goes even more for countries such as Turkey and the Middle East states.
What is 2012 going to be for Bulgaria in terms of foreign investments?
My forecast is that in 2012 Bulgaria's investments in the more sustainable sphere such as industry, energy, and telecommunications will be more or less the same, and I actually hope they will be greater. This year the combined investments in these sectors – including both foreign and Bulgarian ones – because the Bulgarian investors are no less important – amounted to about EUR 1.5 B. If we look at the Investors of the Year awards for 2011 that we handed, there were several Bulgarian firms with investments of several dozen million BGN. One of the projects was worth over BGN 100 M.
On the other hand, I hope that 2012 will be even better when it comes to outsourcing investments. One of the major factors for that is that this year's conference of McKinsey, one of the large outsourcing consultancies, will be held in Bulgaria. This will be the seventh edition of this conference, to date it has been held in various places in Central and Eastern Europe, and this is a sign that Bulgaria is already doing better on the outsourcing map.
In the decade between 2001 and 2011 Bulgaria got EUR 37 B in FDI. Is that a lot or too little? Do you think Bulgaria will be able to surpass this figure in the new decade?
This is certainly a considerable figure for a country with Bulgaria's size whose economy amounts to EUR 35 B annually. In 2007-2008, Bulgaria even was in Europe's top three when it comes to the investment to GDP ratio, which is important.
At the same time, we shouldn't forget that in this period between 60% and 90% of Bulgaria's annual FDI was in finance, trade, and real estate, e.g. many of these funds were transferred from foreign banks to their Bulgarian subsidiaries and were then handed out for company loans, mortgage loans, trading, car leasing, etc. So EUR 37 B is a very nice figure but it is not so nice that it wasn't distributed in the more sustainable sectors.
Whether Bulgaria will achieve a similar result in the new decade it really depends on the global environment. Bulgaria can see once again a surge of investment into finance if it becomes so easy to raise funding on the stock markets once again as it was in 2006-2008. If it becomes easy for a company to get a credit in London in order to build a resort complex in Bulgaria, the situation will be repeated.
It is more important to do what depends on us – attracting investors to industry and manufacturing, and some types of services. I hope that the next decade will be even better than the past one because Bulgaria has already completed its integration in the EU and NATO, it has a much better macroeconomic standing than it had 10 years ago so I am convinced that we will have better investment results for these sectors.