1. General Dynamics of the Registered Private Firms

The dynamics of the private sector can be followed by using the following indicators:

number of registered firms

GDP share

laborforce share

industrial production share

The number of registered firms is an indirect indicator for the development of entrepreneurship since it does not account for the percentage of the registered firms that do not operate. However it could generally indicate the attitude to private enterprise and business activity.

Table 5

Private Companies by Regions and Years of Registration

Source: Informational Servicing of the Firms, Business Register of Bulgaria, NSI, 1994.

The data shows that business set-up made a boom in 1992. This was facilitated by the establishment of the legal framework of the market economy and the private sector as well as the political guarantees for the private business development. In 1993 and 1994 the number of registered private firms goes down, chiefly because the satiated with businesses. There are 332 980 registered private firms, which, compared to an active population of 3 mln people, shows that every ninth household in Bulgaria has a private business. This is a favorable condition for the expansion of the private sector in the country. In spite of the difficulties, entrepreneurship has not yet been frozen up, with a significant part of the population still wishing to have their own business. The drop, however, is significant, and if measures for financial aid for entrepreneurship are not taken, the return to a state-dominated economy will be very likely.

2. Dynamics of the legal status of the private sector

The dynamics of the legal status of the private sector reflects the natural development of the companies' business. The wider range of business objects and bigger profits most often lead to corresponding changes of the legal status.

A survey of the National Statistical Institute among 5 487 firms accounting for 70% of the revenues in the private sector in 1993, provides information about the legal status of the private businesses. 61% of the firms have been registered as sole traders, the chief reasons being the nature of business (36% of the respondents), the minimum amount of start-up capital (22%) and the tax concessions, which are bigger compared to the juristic persons (10%)

Table 6

Legal Types of Registered Private Firms as of December 1994

Source: Informational Servicing of Firms, Bulgarian Firms Register, NSI

Sole traders

The most favored legal status by the private business is the sole trader. 68% of the total number of private firms have this status. These are mostly small private firms, including the family ones. This suggests that the small private business in Bulgaria includes over 60% of the business transactors. Genetically, a sole trader is the primary business form of a private firm. The re-registration of the firms registered under Decree #56 on Business Activity, as provided by the Commercial Code, brought about significant changes in the legal status of the corporations with predominantly private interests.

Joint-stock companies

The joint-stock companies were established by Decree #56 and its by-laws. Art.35 and Art.43 provide the terms and conditions for establishing such companies. With the enforcement of the Commercial Code, the status of the joint-stock companies is envisaged by Arts.161,151,158-252.

At the end of 1992, the number of joint-stock companies totaled 592 and at the end of 1994 - 671, show data by the "Information Servicing of Firms" Department with NSI.

Table 7

Number of Joint Stock Companies According to Decree #56 on Economic Activity and the Commercial Code

(as of December 1992)

Source: State Gazette, 1989-1993, Informational Servicing, Inc.

Note: Data is Published in Economy Magazine, October, 1993.

A joint-stock company status is favored by the bigger corporations. In 1992 the capital of the joint-stock companies exceeded 12 bln. leva.

The joint-stock companies in Bulgaria were first established in the financial sphere. In 1989, 81 of the 88 registered joint-stock companies are in this branch, and more precisely in 64 commercial banks. 1990 marks the establishment of joint-stock companies in other sectors of economy and mostly in the trade one. In 1991 and 1992 they spread in the other branches.

In 1992 most of the joint-stock companies were registered in industry - 164, and trade - 80. The branch structure of the joint-stock companies as a whole reproduces the branch structure of economy, i.e. they are distributed evenly in all branches of economy.

Table 8

Business Purpose of Joint Stock Companies according to the Commercial Code

(December 1992.)

Source: State Gazette, 1989-1993, Informational Servicing

Note: Data is published in Economy Magazine, October 1993

Forms of legal organization in agriculture

The liquidation of the former state cooperatives has not been concluded, despite the provisions of the law. As of the end of 1994 there were still 26 state cooperatives, of which 15 in Bourgas region and 8 in Sofia region. Unlike them, the number of the new cooperative farms is increasing and at the end of 1994 it reached 238. Most of the cooperatives have been registered in Sofia - 65, in Lovetch region - 39 and in Sofia region - 63. It should be mentioned that the cooperative type of ownership is popular not only in agriculture, but also in the retail business, the small industries, etc.

Holding companies

The first holding companies were established in 1992 when 5 such companies with capital of 1,2 bln. leva were registered. These are the types of corporations with the highest concentration of capital. In 1994 there were 41 registered holding companies, most of them in Sofia. The other forms of concentration and consolidation of private capital also expand, as is the case with the consortiums whose number at the end of 1994 reached 62.

The dynamics of the legal status of the private firms reflects two tendencies: firstly, concentration and consolidation of the private sector, which leads to the establishment of holding and joint-stock companies, and secondly, expansion of a numerous small sector dominated by small family businesses.

3. Investment in the private sector

The definition of investment, used by the Bulgarian statistics has not been yet synchronized with the international financial institutions and the G-24 countries. It regards as investment only the acquisition of fixed tangible assets. This distorts the picture of the actual investment in the Bulgarian economy. Besides, it gives ground for underestimating the role of investment in the private sector, since its structure is different - dominated by current assets investment. This is related to the quick liquidity of investment in the private sector.

The existing definition with its restrictive nature also tends yo underestimate the GDP.

In spite of the difficulties with the statistical survey of the investment, particularly in the private sector, the data shows a constantly growing investment activity on the part of the private sector, which is particularly evident in certain branches like construction.

Table 9

Fixed Tangible Assets by Ownership Types

(mln. lv. as of the respective year)

Source: Statistical Year Book, 1994, NSI, p. 111

Given the domination of the state sector in most branches of economy, its share in the investments remains very high - 96,4%. The share of the investments in the cooperative sector is rising. One could expect that if the statistics of investments improves, their structure in terms of property will substantially change. In 1993, the relation of the 560 mln.leva of declared investment in the private sector to the total number of registered private firms shows that the average private firm invested 1 696 leva, which does not correspond to the actual state of matters in the economy.

4. Branch structure and GDP share of the private sector

In spite of the difficulties with surveying the branch structure of the private sector, which is due to the fact that the commercial partnerships do not declare clearly enough their purpose, the data shows two main tendencies:

the share of the private sector in all branches of economy is increasing

the private sector is expanding most rapidly in the services and trade.

In certain branches of economy the private sector is predominant: trade (including foreign trade), construction and services. The smaller share of the private sector in industry is due to the late start of privatization, the insufficient capital of the private business, the lack of forms of mass privatization, the high risk and the low liquidity of the investments in industry.

The branch structure of the private sector is determined by the liquidity of the invested capital, the profit margins and the avails. This rational motivation with the branch diversification of the private capital is proved by the survey of the NSI among 5 487 firms accounting for 70% of the revenues in the private sector in 1993. The survey finds that 70% of the private firms are in the trade sector, which guarantees the quickest liquidity of the invested resources and does not require large start-up capital. The need for larger capital in industry determines the not so keen participation of the private capital - 11% of the private businessmen operate in the machine-building, electronics and food-processing branches. 93% of the private firms in construction do building and repair work. In transport, most favored are the city and automobile transports and the services related to them. In the servicing sector the most attractive activities for the private business are the financial, the credit and insurance, the home and the healthcare services.

The GDP share of the private sector is being estimated differently by the international financial institutions and the Bulgarian statistics. For instance, NSI calculates it at 19,4% for 1993.

Table 10

GDP Share of the Private Sector

(%)

Source: Statistical Year Book, NSI, 1994, p. 117

According to preliminary NSI data, the 1994 GDP is 543,474 bln.leva (according to current prices) and the gross added value is 512,896 bln.leva. The gross added value of the private sector increased by 8,3% from 1993 and makes up 30,5% of the gross added value of the economy. The development of the private sector and the establishment of its branch structure have an increasing influence over the real economy structure. The largest share in the structure oof the gross added value of the private sector is occupied by the services - 45,6%, followed by agriculture - 32,9% and industry - 21,5%. The main services are the commercial services, the business services, the financial and insurance services and housing, public utilities and amenities

The NSI preliminary data shows that the GDP share of the private sector in 1994 is 27,2% of which 12,4% come from services, 8,9% from agriculture and 5,9% from industry. The official data shows a steady increase of the share of ther private agriculture (including the private and cooperative land cultivatioin) in GDP.

The Bulgarian Private Sector according to International Sources

GDP Share of the Private Sector by Countries (June 1994)

Country Share(%)

Bulgaria 40

Albania 50

Poland 55

Romania 35

Russia 50

The Slovac Republic 55

Hungary 55

The Chech Republic 65

Sources: Annual Report of EBRD, October, 1994

Business Central Europe, November 1994

GDP Share of the Private Sector by Countries in 1993

Country Share(%)

Poland 50

The Slovac Republic 36

Hungary 25

The Chech Republic 37

Source: Data is published in Economic Life Newspaper, Jan. 11, 1995 not specifying the source.

Forecast on the GDP Share of the Bulgarian Private Sector for 1994-1998

1994 1995 1996 1997 1998

Share 24 28 35 42 50

Source:Data is published in "Pari" newspaper, January 9, 1995

Note:Data has been taken from the preelection program of the Bulgarian Socialist Party

GDP Share of the Bulgarian Private Sector

1990 1991 1992 1993

Share 2.0 15.0 25.0 36.8

Source: National survey of the Center for the Study of Democracy, The Risk Groups in Bulgaria, 1994

Comparing the different sources of information the GDP share of the private sector, one would notice considerable discrepancies, which are mostly due to the different methods of GDP estimation and the different database. The problems with rendering the financial statements of the private sector as well as its dynamic and flexible structure require adequate statistical study of the most important indicator of the economic reforms - the GDP share of the private sector. Its underestimation because of methodical and operative problems has a strongly negative impact on home and foreign policy.

Another important indicator of the retuning of the economy is the laborforce share of the private sector. NSI data shows that it is significantly higher than the GDP share - 28,3% in 1994. This is largely due to the character of the emerging private sector - small and medium-sized enterprises with high employment.

In 1993 the private sector employed 912 000 people or 28,3% of the active population, while in 1990 it was just 5,9%; this is indicative of the rapid growth of the private sector and particularly of the small business.

In 16% of the private firms, the owner is the only employee. 27% of such firms are in the transport sector and 19% in the trade sector. In the rest of the private firms the owners employ relatives or acquaintances, however, 26% of them rely on job advertisements. Another 16% of the firms, mostly in industry and construction, employ personnel through the job centers, other 23% - through interviews.

5. Financial results of the private sector

Although the private sector in Bulgaria is too young, some negative tendencies in its development could be seen. In the first place this is the division in two subsectors - big and small private business - which operate differently, in different branches of economy and making different profits. There is not a medium-sized private sector, so the private business is split in two.

The public opinion of the large business in Bulgaria does not differ from that of the large business in the developed market economies. The public holds that the big firms dominate the business activity by controlling the volume of production and the prices in their branch. The big companies are identified as monopolists, which can limit the access to the branch for other firms, cause deficiencies, raise prices and influence inflation. The economic theory defines a company as a monopolist in regard to its supply control in the branch, in which "... production is lower and prices are higher than they would be if the branch business were more competitive". The bigger a company's share in the total branch production, the bigger its monopoly power. Preventing other investors from entering the profitable branches leads to inefficient distribution of resources and production capacity, and lower GDP. The division of the private sector into large and small is being done under the lack of clear, transparent and consistent rules of market behavior, which gives opportunities to the big private business for unfair competition.

The analysis of the financial results of the private sector is based on the P&L reports and the balance sheetsof the companies in the private sector, i.e. it does not include the non-operating companies but only those which generate income and make expenses. If the registered but non-operating companies were added up to the analysed number of enterprises, the financial result would be different and the gap betwen the large and the small business - greater.

Sales Income

The net sales incomes of the private commercial companies constitute 73,5% of the total sales incomes in the private sector. State commercial companies occupy a 21,9% share (NSI data for 1993). In 1993, the net sales incomes of the private industrial companies were 12,5% of the total net avails in the private sector, compared to 54,2% for the state industrial companies.

The biggest sales incomes in the private sector come from trade, while in the state sector - from industry. Both sectors make their smallest avails in agriculture.

Table 11

Share of Net Sales Incomes of Private and State Companies in the Total Net Sales Incomess (by branches)

Source: Data is taken from the P&L reports of the companies from the state and private sectors, NSI, 1993

The sole traders who keep single entry make up a considerable part of the registered private firms. They account for 67,7% of the net sales incomes and 77,8% of the net profit in the sector. Sole traders pay 39% of the taxes paid in the private sector, due to tax-collection problems and tax concessions provided by Decree #56 on Business Activity.

The data shows that the private financial sector has far better financial results than the private non-financial sector.

Sales profitability is higher, both before and after taxes, in the financial sector. The liberal operating regime for the financial institutions, the lack of regulation of the investment funds, insurance companies and stock exchanges and the loose bank control are some of the factors that made possible the high profits in the financial sector.

Table 12

Financial Indicators for the Private Financial and Non-Financial Sectors

(in mln. lv.)

Source: The indicators are based on the P&L reports of the private firms, NSI, 1993

Sales incomes vary considerably by branches. The data shows that among sole traders, most of the taxes were paid by commercial sole traders (202 mln.leva) and industrial sole traders (40 mln.leva)

Table 13

Financial Results of Sole Traders by Branches

(in mln. lv.)

Source: Indicators are based on P&L reports of the private firms, NSI, 1993

Profits

Profit assessment of the private sector is one of the difficult areas of analysis. This is due to incorrect collecting, declaring and processing of the information on profits. Taking this into account, the data shows considerable concentration of profits in the large firms. The private companies that declared profits over 10 mln.leva in 1993 are only 1,4% of all private businesses but they concentrate 47,4% of the total profits of the sector. On the contrary, the firms with profits up to 100 000 leva constitute 39,7% of all private firms and in 1993 made 1,1% of the sector's profits.

Table 14.

Distribution of Profits from the Private Sector in 1993

Source: National Statistical Institute

Chart 2

Private Sector Companies According to Profits in 1993

(%)

The data from the P&L reports of the private sector shows that companies profits up to 100000 leva account for 9,2% of the sales and only 1,1% of the profits, while the companies with profits over 10 mln.leva made 23,4% of the sales and 47,4% of the profits. This shows much higher sales profitability (14,5%) of the large business, compared to the small business (0,8%). One should mention that sales profitability increases as profits do.

The chart provides evidence that the companies with profits between 100 000 leva and 10 mln.leva are equally distributed, which proves the lack of true medium-sized business in the country.

Fixed tangible assets

The dual nature of the private sector is to be seen in the distributionn of the fixed tangible assets (FTA) along the different "profit groups". Large business seems to have concentrated not only the profits but also the FTA. 23,1% of the FTA in the private sector are owned by companies with profits over 10 mln.leva, i.e. by 1,4% of all private firms. Small business remains small as far as the FTA are concerned; it owns a low 9,6% of them. The difficult access to credits and the privatization limits the development of the private sector and its possibility to increase efficiency. The other countries have completed the small privatization, the voucher privatization and other forms of restitution, which helped the establishment of the small and medium-sized business and provided incentives for entrepreneurship. The small and medium-sized business was further encouraged by preferential measures and protection on the part of the state. In Bulgaria, the economic reality encourages the large rather than the small business. This threatens the structure of economy. The prosperous small and medium-sized business makes the economy viable and versatile. Obviously, the economic and political circumstances favor the large business, which, however, increases the danger of establishing market and industrial monopoly and limiting the part of competition. This destabilizes the economy and brings about many political and economic problems.

The small business has difficulties not only with the privatization and credits but also with the unfair competition on the part of the large business, the underground economy and the racket. Although the law provides competition protection mechanisms, their enacting and control by the state is a question of future.

The insufficient information cannot give a clear account of the real condition, the amount and type of the fixed tangible assets in the private sector.This makes difficult their evaluation and the obtaining of a real picture of the total assets of the economy.

6. Economic efficiency

The economic efficiency of the private and state sectors can be assessed on the basis of comparison of the indicators envisaged by Decree #196 of the Council of Ministers of 1994. The calculations are in compliance with the methods of determining the financial and economic criteria, worked out by the Ministry of Industry with regard to Decree #45 of the Council of Ministers of 1994 and its Regulations on criteria for developing the programs for financial recovery and restructure of state enterprise, firms and commercial partnerships.

The private sector efficiency indicators are far better than those of the state sector.

Efficiency indicators:

The given coefficients have been calculated on the basis of the P&L reports and balance sheets of the private and state enterprises as of 12.31.1993.

А. Private Sector

Table 15