Organizer: Internet Securities Inc. Welcome Remarks: H.E. James Warlick, US Ambassador to Bulgaria Speaker: Mr. Kenneth Lefkowitz, Managing Partner at New Europe Corporate Advisory

1. 27 January 2011
DOING BUSINESS IN BULGARIA
Challenges and Opportunities
from a Foreign Investors’ Perspective
Presentation by Kenneth Lefkowitz
Managing Partner
New Europe Corporate Advisory
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2. Contents
Section 1 Foreign investors in Bulgaria
Section 2 Challenges
Section 3 Opportunities
Section 4 Conclusion
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3. Section 1
Foreign investors in Bulgaria
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4. Overview of FDI in Bulgaria over the years
What has been attracting investors so far?
• EU membership and harmonizing legislation
• Currency board and fixed exchange rate
• Growth of domestic consumption
• Before the crisis: real estate, retail, tourism
• Currently: energy sector
€10,000 €5,000
EUR Foreign direct investments GDP per capita
billions
€8,000 €4,000
€3,000
€6,000
€2,000
€4,000
€1,000
€2,000
€-
€-
Source: BNB, Unicredit
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5. What are the challenges and opportunities ahead
Challenges
1. Regulatory instability
2. Corruption
3. Poor institutional infrastructure
4. Small market
Opportunities
1. European Union and geographic location
2. Low taxes
3. Labor force
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6. Section 2
Challenges for foreign investors
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7. Challenges to foreign investors
#1 Regulatory instability
• Lack of a vision and long-term strategic objectives to shape
regulation. Laws are dictated mostly by EU, which results in
patchwork legislation imposed over outdated texts.
• Policy making is often either too general, or incomplete, or not
entirely economically justified.
• Treatment of foreign investors varies significantly between
the different governments, along with the list of “preferred”
countries.
• Transparency of decision-making is sometimes questioned. It
is often unclear how drafts are prepared and why certain
revisions have been made.
• Communication with interested stakeholders, although
improving, has further potential for development.
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8. Challenges to foreign investors
#2 Corruption
• Corruption ultimately destroys value for everyone involved.
• Fair-play becomes a competitive disadvantage for certain
investors who refuse to bribe. The Foreign Corrupt Practices
Act (US) and the Bribery Act (UK) could be devastating to
multinationals’ reputations - but they police fair practices where
local authorities fail to do so.
• No visible improvement in fight against corruption over the
last decade. Bribing is perceived as “business as usual”. The
longer this mindset remains, the harder it will be to eradicate it.
7.0
6.5
6.0
Estonia
Poland
5.5
5.0
Czech Republic Corruption Perceptions Index,
as measured by Transparency International.
4.5 Scores range from 0 (most corrupt) to
10 (least corrupt)
4.0 Bulgaria
3.5
3.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Transparency International
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9. Challenges to foreign investors
#3 Poor institutional infrastructure
• Education is unsatisfactory. Local universities provide
education that does not satisfy the requirements of the market.
Innovation is now mainly imported, not fostered locally.
• The legal system is unreliable and too cumbersome to be able
to protect well the rights of citizens and businesses.
• Physical infrastructure is poorly maintained (although
improving) and does not correspond to the needs of the
population.
• Bureaucratic government apparatus is a challenge for most
businesses. Generally, issuing permits, paying taxes, and
trading across EU borders are the most problematic areas.
Electronic applications and submissions are not used to their
full potential.
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10. Challenges to foreign investors
#4 Small market
• Limited physical market – Bulgaria has just 7.5 million
inhabitants (and decreasing).
• Low purchasing power of the population. Bulgaria is the
lowest-wage EU country, with the lowest GDP per capita. This
means that introducing new products and services has limited
potential. From the perspective of a large foreign investor, the
fixed cost of expanding is not always justified for such a small
market.
• Demographic problems which started from emigration and
which a negative birth rate exacerbates further. The population
is quickly aging, which additionally shrinks most markets.
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11. Section 3
Opportunities to foreign investors
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12. Opportunities for foreign investors
#1 EU and geographic location
• European Union candidature and membership have proven
invaluable for:
• Improving local legislation and administration.
• Securing funding for private and public projects that would
have otherwise been unavailable.
• Reducing customs formalities, which will be completely
eliminated with entry in the Schengen area.
• Diminishing political and regulatory risks.
• Minimal exchange rate risk, due to currency board and
promised eurozone membership, is a major advantage over
other countries with similar economic profiles.
• Geographic location between Turkey and Europe is important
both as a transit route and as a potential for future growth.
Bulgaria is likely to benefit in the mid to long term from Turkey’s
growth. Bulgaria is also important for the development of the
Balkan countries.
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13. Opportunities for foreign investors
#2 Labour force
• Well-educated generation Y workforce. Much of the
population born after 1980 has gone to study abroad for higher
education. The combination of visa requirements and economic
crisis has urged many of them to come back. This workforce is
usually flexible, multilingual, and is available for a fraction of the
cost of their counterparties in EU15.
• Language skills are usually strong among all age groups of
the urban population.
• Strong legacy in mathematical fields. Bulgarians deservedly
have an excellent reputation in subjects such as mathematics,
engineering, and information technology. This has resulted in
many firms setting up outsourcing centers in Bulgaria.
• Low costs of employment. Bulgaria has the lowest nominal
wages among EU 27. Laws also mandate low health security
contribution and a modest employer contribution to social
security.
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14. Opportunities for foreign investors
#3 Low tax rates
• Corporate income tax of just 10%, or 0% in areas with high
unemployment.
• Personal income tax of 10%
• VAT exemption of 2 years for imports of equipment for
investment projects over € 5 million, creating at least 50 jobs
• Depreciation of 2 years for computers and new manufacturing
equipment
• Opportunity to write-off R&D expenditures
• 5% withholding tax on dividends and liquidation quotas (0%
for EU tax residents )
• No restrictions on after-tax repatriation of profits
• Few taxes were raised during the crisis, unlike in neighboring
Romania and Greece.
Source: Invest Bulgaria Agency
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15. Section 4
Conclusion
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16. Doing Business in Bulgaria: Challenges and opportunities from Foreign Investors’ Perspective
Conclusion
Unfortunately, challenges remain because:
• Regulatory framework remains largely fluid and unpredictable.
• Corruption is rampant in all areas of life and perceived as
something normal.
• Institutions are in most cases weak and fail to protect or
educate its citizens
• Bulgaria is a tiny country with aging population, which results in
a very small market for most products
But on the bright side, opportunities come from:
• European Union membership, which promises constant
improvement of legislation, a common currency, facilitated
border control, and free movement of capitals.
• One of the most favorable tax regimes in Europe
• Labor force, which is often well skilled, multilingual, foreign-
educated, and comes cheap.
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17. Thank you for your attention
Questions?
KENNETH LEFKOWITZ
Managing Partner
New Europe Corporate Advisory Ltd.
9 Narodno Sabranie Square, Sofia 1000, Bulgaria
tel.: +359 (2) 988-7390
mob.: + 359 888 637-053
fax: +359 (2) 981-6206
web: www.necadvisory.com
e-mail: kenneth.lefkowitz@necadvisory.com
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