Business in Bulgaria Succeeding in Spite of the State

Bulgarian company Extrapack, is thriving, with 50m lev (m) in annual sales and a profit margin of around 4%, according to The Economist, photo Extrapack

Economist

Honest Bulgarian firms specialise, stay small and steer clear of the government

MILEN GEORGIEV'S father had bought him a kit of cheap magic tricks. That was lucky, because it helped the young Bulgarian figure out the sleight-of-hand in the hustlers' three-card con trick at an open-air market in Sofia. Over ten weeks, Mr Georgiev made 1,000 lev (then around at official rates), while getting just 90 lev a month on his student stipend. The hustlers started turning him away.

"This was good capital at this time," he says. It was 1991. He and a friend went into business. First they bought and sold plastic bags, then bought a machine for making them. Mr Georgiev financed new machines at 6% a month from local lenders. He fended off one protection racket by hiring another at cheaper rates, and paying the police for a panic button in his offices. Palms had to be greased to get telephone lines set up, and imports through customs.

But today his business, Extrapack, is thriving, with 50m lev (m) in annual sales and a profit margin of around 4%. He says he paid his last bribe in 2004. It is possible to do clean business in Bulgaria. But it is complicated. Surveys by Transparency International, a watchdog, find that businesspeople perceive it as the most corrupt country in the European Union. Bulgarians often say that winning a government contract is impossible without corrupt connections. Krasen Stanchev of the Institute for Market Economics in Sofia says the government breaks contracts into chunks, to discourage big foreign companies from bothering with them.

Bulgarians took to the streets this year, in daily protests in front of the parliament. (The spark was the nomination of a well-connected but otherwise unqualified 33-year-old to run the national-security service.) But people have been grumbling about corruption for years. Successive governments have passed modest reforms to make doing business cleanly a little easier. A 10% flat corporate and income tax limits the scope for bribes, but a proliferation of social-security contributions means that firms spend more hours filing tax forms in Bulgaria than in any other EU country. Bulgaria is in the EU's middle ranks as regards the time and money needed to start a business. But for the time required to get licences, it ranks near the bottom—though Cyprus, Malta and Spain are worse.

Successful Bulgarian entrepreneurs take a spiky kind of pride in making it in their home country. Ivaylo Penchev left Extrapack to found Walltopia, now the world's largest maker of climbing walls for gyms. With the trim physique and energy of a climber himself, Mr Penchev thinks that only mediocre bosses spend their time griping about the government: "Complaining is a national sport in Bulgaria." Walltopia sells to 50 countries, and because its walls are considered structures, it must get building permits for them. Although he acknowledges the problems in his country, he says "California is much worse. France is dramatically worse."

The biggest problem Bulgaria has is the education system, Mr Penchev says. In particular, he laments the generation educated just after the fall of communism. They lost the communist era's discipline, but had not yet learned Western ways. Kiril Asenov agrees. Asked his top three priorities from the government, he repeats: "Increase education spending ten times." His father founded Arexim in 1991 by dismembering a forklift for parts that he used to make an injection-moulding machine. Arexim now makes precisely engineered plastic parts for the likes of Bosch and Siemens, two German high-tech manufacturers. Mr Asenov sees foreign firms moving some low-skilled work to Bulgaria. But growth in any higher-value-added work will be constrained by the quality of schools and universities.

The formula for business success in Bulgaria seems to be to specialise, produce for export and stay small enough to avoid upsetting powerful interests. Anything requiring the state's support (skilled labour, infrastructure) will take forever arriving. Bulgarian entrepreneurs say things are not as bad as they were. But EU membership and years of rising living standards have raised ordinary people's expectations. If businesses meet them it will be despite the government, rather than with its help.

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