What is your view of the industry sector in Bulgaria?
Bulgaria is a relatively small country. The industrial sector is more than 90% in private hands now. The process of privatization has taken place in the past 5 or 6 years. The Ministry of Economy, where we are at the moment, is responsible for general overseeing, monitoring and maintaining of relationships with the business from the perspective of the government.
The industrial sector has greatly changed during the past decade. Bulgaria has once been specialized in several areas: computer production, including microchips and other hi-tech products, within the framework of the East Block Bulgaria was one of the few counties specialized in this. The second field was pharmaceuticals production. The third field was cosmetics and chemistry in general. We were also specialized in food processing and food production. We were specialized in a number of machine tool productions: forklifts and pneumatic equipment. And, of course, we were one of the world's biggest producers of cigarettes, by far the biggest producer in the East Block. This is the industrial sector. Bulgaria is also famous for its well-developed tourist sector and agricultural products.
That was in the 80's. In the early 90's things started to change, of course. Since then the picture has evolved. Now many of the old industrial giants have declined or have been broken into smaller pieces. Those which have not been privatized have more or less been neglected or moved to liquidation or bankruptcy procedures. Unfortunately, we have delayed privatization for a long time. The other East Block countries managed to finish with the privatization process in 2-3 years time starting in 91-92 and ending in 94-95, while we have started the active process of privatization here in 95-96 and this delay has been at great expense to us.
The process of privatization is now behind us. The thing that has been left in this process, and it is a very interesting thing, is the energy sector. Bulgaria is the biggest energy producer in the Balkans and it is the only country with excess energy production. All our neighboring countries are in fact net importers of electricity, while we are net exporters. And we plan to remain so in the next years to come. The energy sector is in good economic shape. It has sustained profitability and good prospects for development. It has a steady history of investments and is relatively modern in technology, while also being environmentally friendly unlike many East-European countries. The privatization of the energy sector has been scheduled for next year and we plan to do that as early as possible. Basically, there was deregulation there - the privatization of the energy sector has been delayed due to the deregulation law that had to be put into effect. Now all producers have been registered as separate legal entities and the national energy grid has been separated. The utilities, the distribution networks in the different regions, have also been separated into separate companies. All of them are ready for privatization now.
As far energy distribution is concerned, we are also developing the gas market. Bulgargas, one of the biggest monopolies in the country, is in the process of being reformed or broken up into smaller companies - a distribution network and utility companies for domestic and industrial supply of natural gas.
These are the most important industrial areas in Bulgaria now that are active unlike 10 years ago - heavy chemistry, including soda ash production, fertilizers, also the pharmaceutical industry has managed to remain standing on its feet and has even increased sales and profitability. The machine working and machine tooling sectors have declined. The computer sector has also declined but we have seen the springing up of a number of hi-technology firms in the private sector starting from scratch in the field of software development and engineering. Bulgaria is becoming a center where multinational companies outsource a lot of engineering projects. They find their local partners and assign a project for execution on a remote basis while sharing information over the Internet for instance. We are witnessing increasing interest in big multinationals to create engineering knowledge centers with local staff. Instead of trying to recruit local engineers and send them abroad (to France, the United States or Germany for example), they prefer to set up a center equipped with good communication facilities and assign out projects from their units all over the world for execution here. Later they transfer the results to the respective location where the project came from. This is the current state of affairs.
The tourist sector is going through a big boom. We have more and more tourists coming here every year. There have been major investments by both domestic and foreign companies in this sector. Our resorts - both summertime and wintertime - have drastically changed and I should note they are standing at world class right now, retaining a good ratio between cost and quality.
You were talking about legislative reforms. What is the stage of those reforms? And when do you think they are going to be completed?
When we talk about industrial policy, we have to define the role of government. The role of government has drastically changed in the private economy now. This ministry is basically expected to run the economy. It used to be the owner of most of the enterprises, it controlled them, it appointed the Board of Directors and it took major decisions regarding investment plans and development in general. Now this is no longer the case, we influence industrial development mainly by regulatory initiatives and we strive to provide a better environment for business.
We have noted that many of the problems in the industrial sector come from heavy and long-lasting legal procedures, especially in liquidation and bankruptcy cases. A number of enterprises in this country have become bankrupt over the years and they have seen bankruptcy proceedings lasting as long as 5 or 6 years. That is absolutely impossible and inconceivable for the creditors because if you are a creditor of a bankrupt enterprise, you want to collect as soon as possible whatever is left from your receivables. The current system does not allow a fast bankruptcy procedure. It is inherent in the current law system that, if you are a creditor, you will spend at least a couple of years in bankruptcy procedures before you can collect anything.
We plan to initiate changes in the law that would allow a bankruptcy procedure to finish in 5-6 months. We also plan to improve the forced collection procedures, which are currently also a sore point for the private business, especially for the banks. If a bank gives out a loan, it will have a hard time collecting and foreclosing on the collateral if the loan goes bad. It will spend at least two years in court cases before it can recover at least a part of what their investment is. We plan to create a proper legal structure in order for banks to collect as soon as possible and that would of course initiate and foster lending in the private sector, which unfortunately has been rather low lately.
Bulgaria has seen a major banking collapse in '96 and '97. Since then society has necessitated strict control and monitoring of the banking sector in order to prevent a collapse of that nature to occur again. Now we are far from collapse. We are in fact in the best shape of the banking sector, probably for the last decade. But if we are talking about the good shape of industry, a good banking industry cannot thrive if there is not a good thriving industrial sector behind it, which the banks are in fact living on. The banks are over-liquid right at the moment, they have abundance of liquidity and they have no investment alternatives. First because the government of the past years, has adhered to a very strict budget discipline and low levels of deficits, because of which we have seen a very low issuing of treasure bills. Therefore the banks cannot find government debt as a good alternative for their money. On the other hand, banks have refrained from financing private projects on a long-term basis due to budget concerns for collection procedures, as I mentioned before, and second, because of the criminalization of lending on uncollateralized basis.
In '97 there was an amendment in the banking law, which criminalized lending on uncollateralized or clean basis. The banks' management was required to request collateral in each case, in most cases exceeding 120% of the loan amount. That of course limited the number of projects for financing to very few. Furthermore, the problems with the collections in the court system restricted additionally the lending. So we are in the position when we have over-liquidity in the banking sector and lack of liquidity in the industrial sector, which is a nuisance and we have to undertake initiatives to allow banks give credit on an easier basis and at the same time see that the court system is more efficient and quicker in its procedures.
Something you are working on is to discontinue the inefficient insolvency procedures, what is the reason for that?
That is part of the problem we are working on. We want the government to spend more time helping the working industry rather than trying to solve the problem with bankrupt enterprises. We have several aims to achieve. One is to free the limited capacity of the courts, of the legal system. Second is to allow creditors to collect whatever is possible to be collected from bankrupt enterprises. And the third is to allow some of those enterprises that have entered bankruptcy procedures to stand back on their feet and try to start producing again. We believe that many of the bankruptcy procedures could be speeded up or interrupted and stopped altogether by an initiative allowing part of the creditors to become shareholders. Now, this should be considered in the framework of the constitution way of handling private property as a sacred principle you cannot really intervene and try to make any kind of creditor give up their receivable.
What we are going to do is to allow bankrupt companies to apply for sanitation or revival plans that would put them out of bankruptcy, with the consent of the creditors of course. Second, we are probably going to reduce the area of the assembly of creditors from 50% for voting purposes in taking decisions to let's say 35%. So we will have a greater chance for creditors to come together around a single solution for reviving the enterprise. Right now we are not seeing much consensus among creditors. We always see a lot of people trying to collect money by any means, even if that means that the enterprise is going to be scrapped altogether. More often than not, the scrap value of the assets is much less than what these assets could produce over a long period of time if they were productive. And we want to make non-productive assets productive because that would increase employment, the fiscal revenues, that would decrease social spending and that would provide a serious start for an economic revival program.
If we have 1000 enterprises in bankruptcy procedures right now, and 20% of those come out of bankruptcy due to that initiative, that makes 200 enterprises that would employ anything between 10 000 and 50 000 people. That would be a strong recovery for the economy to start with. That would mean further spending on the side of consumers, because there will be new people employed in the factories and so on.
We understand that stopping those procedures is also to help privatize and sell better the companies, isn't it?
That would be an additional effect, which I have not really touched upon. Many of these enterprises are still state-owned. If you allow the creditors to become shareholders that would in fact mean a privatization of some kind. We do not want to force any creditor to become a shareholder. | This opportunity exists in the law right now but it is not widely used. We do hope that when we push down the barrier for the creditor assembly from 50% to 30% for example, there will be a greater chance. I would imagine the state might even come to 30% with most of its receivables and associated companies, like the National Electric Company, the Bulgarian Telecommunications Company, Bulgargas - the national gas monopoly - and having in mind that all bankrupted banks' receivables have been assigned to the state according to a law that was passed a few years ago. The combination of all those receivables might come to 35% or 40% in some cases. That would allow the state and its subordinate units to make decisions where they have the assembly of the creditors and to impose a solution. That means you have an equity swap and thus you make the creditors shareholders, or you make some other reductions and rescheduling of the debt in order to revive the enterprise.
Talking about the privatization of those companies, do you think that these procedures will be enough? Is the government or the ministry working to attract foreign companies to participate in the privatization?
The privatization in Bulgaria so far has not been a very successful one. The reason for that is the lack of a serious marketing effort abroad by the government. We should acknowledge one thing: we do not have the savings here in Bulgaria in order to be serious investors, and in many cases we don't have the proper management know-how in order to acquire and run a company in a competitive way. Investors with serious investment potential can come only from abroad. And we do need specialized management know-how, which is more common in the US and in the West rather than in Bulgaria. I believe we should have made a more serious effort to talk to investors in the financial centers of the world like London, Frankfurt, Paris, Amsterdam, Brussels, New York, Tokyo, and many places where we have not really knocked on people's doors, unfortunately.
I can give only one example here about Treuhand - the East German privatization agency, which was closed a few years ago because they had finished their job. I believe they made a series of raw chores around the world to market their enterprises and they did a very good job with that. They attracted serious investors from all over the world and they finished in an incredibly short period of time with the tremendous task of selling a whole country basically.
What we did in the past several years was that we sat here in Sofia and pretty much did nothing else. We hoped people would come here and show interest without any effort on our part and we were wrong of course. The results are obvious. We privatized mostly the industry through management buy-outs because there were no other buyers and there was no other alternative. And now we have the sad story of at least half of those management buy-outs going bankrupt. Therefore I see a second wave in the restructuring of the economy when those management buy-outs will be resold to new investors who can really manage them and realize their potential. Because the current owners do not have the financial resources, or the management know-how in order to run their businesses well. This is obvious in many respects.
We may help now foreign investors enter the market here either through bankruptcy procedures that we can initiate against certain already privatized companies in bad financial condition. So foreign investors will be able to come in and take the assets clean, without any receivables in a tender procedure. This, I think, would be the preferable way because you have no other commitments for employment or inherent debt or any kind of threats behind it. I see a new wave of investments coming from abroad in the acquisition of asset deals - not enterprises as such but clean assets. That is one way to attract foreign investment now. The other way would be to broker deals between the owners of already privatized companies and investors expressing interest. The state can only assist in disseminating information but we do expect the commercial banks operating in Bulgaria, like BNP Paribas for example, like Citibank, like ING Bank and a number of other banks, to use their extensive branch networks and market in front of their clients the market assets that are based in Bulgaria, the industrial assets that are lucrative and economically efficient, because they would be profiting from the investment banking side. They can make a nice commission out of the deal and then furthermore they can have a good commercial partner later on when the business develops. We have already started talking to those banks and seen great interest on their part in such an idea. We help with information and organization of seminars and meetings focused on the attracting of foreign investors with the help of the banking community here.
Does your corporate background help you in making decisions?
Certainly, when I started working here about 1.5 month ago, I noted one particular thing, which surprised me very much. The administration right now does not have a relationship management unit, which takes care of the corporate sector or the business in general. There is no office, no particular place where businesses can place their problems, concerns, ideas or proposals in general. There's no one to turn to, there's no one to listen to what they say. The government actually does not provide a service to the business. We are all public servants here but the services we provide are of a very limited nature and the business is not very content with what we give at the moment.
Therefore I set myself to the task of creating a relationship management department, staffed with about 20 senior relationship managers. They will be responsible for maintaining close contacts with executive directors of bigger corporate structures in Bulgaria so tat their issues are properly addressed and managed through the administration. This relationship management team, based here, at the Ministry of Economy, would be the best friend of business in the government and they will monitor the progress of their correspondent issues and problems through the other branches of the administration. And if they have a problem with the Ministry of Environment, Ministry of Agriculture, Ministry of Public Works, the place to call is the Ministry of Economy. Call your Relationship Manager and he is going to make the following phone calls later on internally because we can do that.
For the business community the government is a black box: you leave a piece of paper on the table, it disappears and 2 months later you don't know what's going on, no one tells you. The desk where you left the piece of paper just gave you a reference number and nothing else. You cannot really call the lady there because she is only a desk associate and cannot help you with information further on. Now this Relationship Management Unit is going to take care of the business. It is like in a big investment bank for instance, like in a big company where you have key accounts and Relationship Managers or Account Managers, whatever you call them.
We are going to set up such a department here that would serve two purposes. One of the purposes is to channel the communication from business to government and vice versa: if you have a government initiative that affects business, and virtually all government initiatives affect business, they have to communicate that to the business in advance, get their opinion, get their concerns in writing and inform the other branches of the government that have imitated the project. So those concerns can be taken into consideration. Right now this is not the case. The business has always been surprised, they have never been asked in advance about legislative initiatives. Now we plan to change that seriously.
And we also plan to outsource a lot of our legislative initiatives to the business. We acknowledge we do not have the administrative capacity and the know-how in general to do everything we need to do. For that purpose we rely on business to provide us with all kind of texts and initiatives they deem necessary and appropriate to be implemented. We will review them and provided they are well backed up by arguments, we will accept them.
We also plan to start producing information products that would enlighten and put the processes in economy in perspective. Now no one knows very much what is going on in the economy. I'm sure you don't know. Although you probably have very good information sources, but if I ask you what is going on with a particular big enterprise, what its financial condition is and where the sector is going to in general, you will probably not be able to tell me immediately. That is because, unlike the US where you have the Bureau of Economic Analysis as part of the Department of Commerce, here we don't have a proper government organization, which produces credible, valid, timely, accurate and easy to digest economic data. We have the National Statistic Institute, which is a good collector of data, however is not a good producer of information. They have massive databases with extensive computer capacity and human resources but we have not seen much use or much creative thought on their part. So we plan to use their resources actively from now on.
I should say that those Relationship Managers I talked about a while ago will have the function to be the same analysts you would see in an investment bank, sector analysts producing sector statistics, analyzing sector trends, doing benchmarking analysis about a big company for example that is running into trouble - they have to be able to tell whether this is sector trouble or trouble of that specific company. They will have to do benchmarking analysis how the sector stands compared to the same sector in other European countries, compared to other sectors in the economy, what the bigger players are and so on. They should know the trends and inform all interested parties where we are going and why we are going there.
So those information products, bulletins, produced on a monthly or quarterly basis, would serve as a major decision making tool for the government, business and households also. So you will never be surprised, you will be expecting what you are going to see in the economy in the next 6 months or one year. Right now we are acting retroactively, that is, we have information six months later and we only acknowledge that something has happened. All we know is the result but we don't know the reasons. I believe that in order to have a good industrial policy, you need to have good information. Furthermore, good information provides for efficient markets, which is one of the accusations we have seen directed to this country for a long time.
I believe that with good quality information disseminated properly, we would be able to improve the general climate here and the quality of government decisions.
Were you a member of the Easter Movement?
I was not.
What would be your message to our readers?
It is obvious that this country has stepped on a good track and it is by far the most stable and prosperous nation in the region. I should mention one thing however. Right now this is a good place for business, not because we are intelligent and beautiful people here, but because we are going to make a huge profit if you invest now. Assets are going to go up in value several fold in the next few years. And those who get in now are going to reap the benefits in five years time. I would advise anyone who has serious intentions and investment potential to look in detail what we can offer. And we can offer a lot.
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