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November 29, 1996
Sofia
INTRODUCTION
1. General Orientations
The Policy Forum aims to identify those factors that
will improve the economic and legal environment for the growth of
the small and medium sized enterprise (мSMEо) sector in Bulgaria.
The forum is designed to bring together some of the countries most
influential individuals, representing various institutional and
independent bodies, to discuss the constraints that are hindering
the development of the SME sector and to propose and review various
recommendations to overcome these obstacles.
The background paper attached hereto, outlines the
basic problems that will be discussed at the forum. Recommendations
prepared by participants and discussed at the forum will be
incorporated into the final paper. By preparing recommendations in
advance based on the topics to be discussed, participants will
provide a greater number of feasible recommendations for the
development of the SME sector. By discussing the recommendations in
an open forum, immediate feedback will be provided for proposals
and will create wider support and acceptance of the report.
2. The Background Paper
The background paper is broken into three main
sections. Section 1 discusses the actions needed to improve the
economic climate to support the SME sector. Section 2 discusses the
actions needed to improve the institutional and legal environment
for SMEs. Section 3 describes a monitoring system to determine
whether or not the proposed actions from Sections 1 and 2 have been
implemented with the desired results obtained. Each section is
further divided into ACTION LINES. BACKGROUND information is given
under each Action Line followed by its OBJECTIVES. Then, specific
ACTIONS are described to achieve the objectives of the Action
Line.
3. The Importance of the SME Sector
The success of Bulgariaнs SME sector is essential to
the development of the economy as a whole. Foremost, SMEs are labor
intensive and capable of creating many new jobs at low costs. These
jobs will be necessary to absorb new unemployment created by
restructuring former State Owned Enterprises (мSOEsо). Among other
important SME contributions to the economy are:
· SMEs service the needs of larger corporations and
provide services that facilitate business. One role that SMEs can
play is as suppliers to larger companies thus contributing to the
external competitiveness of these firms.
· SMEs are a source of innovation on the basis that
they are more flexible, more dynamic and more sensitive to shifts
in demand than larger firms.
· SMEs contribute as мSeed-Bedsо from which large
companies can grow.
· SMEs will provide an additional market for the
purchase of second-hand equipment from SOEs.
· SMEs train entrepreneurs needed to develop the
private sector and foster private investment..
As a result of these factors, the larger and more
developed the SME sector, the greater the SME contribution to the
growth of the economy.
Therefore, it is imperative that during this time of
concern, that the Bulgarian authorities take into consideration the
role of SMEs in the economic development of the country.
The product of this policy forum will provide a
guideline for officials to adhere to when developing the overall
plan for the country so that the proper recognition of the
important role of SMEs in the development of the Bulgarian economy
is included.
1. ACTION LINE 1: IMPROVING THE ECONOMIC CLIMATE,
POLICY
AND SUPPORT FOR SMALL AND MEDIUM SIZE
ENTERPRISES
1.1 ACTION LINE 1.1: ECONOMIC STABILIZATION AND
IMPROVING
OF THE BUSINESS CLIMATE
1.1.1 BACKGROUND
The economic destabilization and deterioration of
the Bulgarian business environment has seriously restricted the
development of the SME sector. Moreover, not only has the sector
experienced serious governmental neglect, but it has also undergone
direct evolutionary oppression as a result of various official
policies, including the ruining practice of subsidizing the public
sector. While such macro-economic failures affect all private
enterprises, the impact on the SME sector is compounded due to its
general inability to access capital and information.
1.1.2 OBJECTIVES
The objective of this action line is to address the
development of the SME sector vis-a-vis the stabilization and
improvement of the Bulgarian economy. More importantly, this action
line emphasizes the importance of including specific policies and
measures in such macro-economic actions that address the specific
concerns and needs of SMEs. The purpose is not to propose those
specific macro-economic actions necessary to stabilize the economy,
but rather to acknowledge conditions that are essential for the
development of the SME sector and to stress the importance of
addressing SMEs in such macro-economic actions.. These actions
are viewed as a function of several parameters, namely, the
acceleration and expansion of economic reforms, anti-crisis
regulation and stimulation, and the opening of the country to
foreign investors and partners.
1.1.3 ACTIONS
The actions foresee:
1. the development of an anti-crisis program in
which the place and role of SMEs will be clearly and responsibly
stated (ANTI-CRISIS PROGRAM).
2. the development of a strategy for speeded,
full-scale privatization, with maximum broadening of the applied
privatization techniques (ACCELERATION OF THE PRIVATIZATION
PROCESS).
3. the development of a national strategy for
attracting foreign investment, including decisive measures for
improving the general business climate in the country (FOREIGN
INVESTMENT STRATEGY).
4. the implementation of decisive measures
(legislative and organizationally-administrative) for establishing
steady tax policy and practices (TAX MEASURES)..
5. the implementation of measures for narrowing the
perimeter of activity and influence of the shadow economy and the
creation of a competitive environment without distortions
(ACTIONS AGAINST SHADOW ECONOMIC AND CRIMINAL
ACTIVITIES).
ANTI-CRISIS PROGRAM
Background
Since the restructuring of the economy which began
in 1989, there has been no consistent and long term strategy for
the development of economic priorities. While continuously stating
the need for structural reform, the government still cannot point
out the sectors it plans to prioritize. All this deprives the
private sector, and SMEs in particular, of the ability to work out
their own strategy, relevant to national economic policy. In
addition, the dialogue between the authorized state institutions
and private businesses has been disrupted, which deprives
entrepreneurs of the ability to influence national economic
priorities.
Recommendation
In recent months, structural reform in Bulgaria has
been spoken of widely. While a discussion of the proposed currency
board extends beyond the scope of this report, SMEs will face
serious consequences either as a result of the boardнs
implementation, or lack thereof. Furthermore, the board and various
other structural reform measures that have been independently
mentioned are only one of the essential elements of an anti-crisis
program.
In light of these measures, the successful
development of the SME sector depends largely on how thoroughly
anti-crisis actions embrace the crucial role of SMEs. Specifically,
all measures stated below must incorporate objectives designed to
better the SME sector. While a basic anti-crisis program that
successfully stabilizes the economy will undoubtedly benefit the
SME sector as well, such a process, without specific SME
consideration, will result in a lost opportunity to concurrently
build a strong foundation of SME support and expansion into the
strategic industries of Bulgaria.
To establish a favorable working climate in which
SMEs can thrive, such a program must contain several key components
that also specifically recognize the special needs of SMEs: fiscal
and monetary actions to lower interest rates, inflation and taxes
(particularly of the profit tax); measures to stabilize and promote
the development of the banking system; policies and support for the
benefit of strategic industrial sectors; export programs which
include financial backing and insurance; and foreign investment
strategies that support the overall goals of the anti-crisis
program.
In the framework of common measures, the development
of a real and expedient structural reform package is of critical
importance. In order to finally realize this reform, which for all
these years remained in the sphere of promises and political
speculation, what is needed is a clear, practical and transparent
program for its carrying out.
ACCELERATION OF THE PRIVATIZATION PROCESS
Background
Experts estimate that the percentage of state owned
property is still well above 90 per cent. Non-competitive state
owned enterprise (мSOEsо) business practices crowd out SMEs from
competing in their common industries. SOEs also encumber the
success of SMEs in developing industries by creating a deficiency
of competitive suppliers, distributors, and industrial consumers.
In addition, the slow privatization process has curtailed
international interest in the SME sector and the Bulgarian market
in general. Failure to carry out privatisation measures has
provided fewer opportunities to purchase Bulgarian companies and to
form joint ventures. It has also provided an unfavorable investing
climate since maintaining significant public ownership goes against
the understanding of a free market system.
Further, budget losses continue to pileup from SOE
employee benefit payments and foregone tax revenues. Also,
maintaining state ownership of companies continues to erode both
the value of their assets and their competitiveness. Thus, the
longer an SOE is held, the greater the cost to the state and lower
the price of the sale.
Recommendation
In addition to accelerating the privatisation
process as a whole for the well being of the Bulgarian economy, SME
privatisation must be made a priority of the process. While
significant attention has been paid to the мgemsо of Bulgarian
industry, the privatisation of most state owned SMEs has been
neglected. Within the economy, only a relatively small portion of
the total national capital assets are мlargeо
enterprises(statistically, these companies have constituted only
10-15% of the enterprises of centrally planned economies). SMEs
should be sold off quickly and expediently. Consequently, in
addition to its importance to the development of the SME sector,
selling off such enterprises will make the privatisation of large
SOEs easier.
The relevant authorities need to adopt a simple
policy for the immediate sale of SMEs and other small properties.
Specifically, an accelerated system of sale similar to those
implemented in most Eastern European countries must be established.
This includes the establishment of a break even cost of holding the
businesses and a minimum sales price for the enterprise. Then,
following an impartial auction procedure, a competitive bidding
situation should be created which would result in prices at least
above the break even level. The break even price can be estimated
by determining the liquidation value of the assets of the company
and subtracting the costs associated with keeping the company state
owned, such as welfare benefits for employees, financing and other
administrative costs.
However, while emphasis needs to be placed on the
SME privatisation, this does not mean that SME privatisation should
commence at the expense of an acceleration of large scale
privatisation. The need for a fully functioning market economy is
not only essential to the development of the SME sector, it is
imperative for the success of the Bulgarian economy as a whole.
FOREIGN INVESTMENT STRATEGY
Background
Since developmental aid and government initiated
capital formation have become difficult to acquire, equity capital
for SME development, and the development of the Bulgarian economy
as a whole, must come from the private sector, both indigenous and
from foreign investors. As Bulgaria currently has little or no
domestic risk capital available, it needs to attract capital from
abroad. And therefore, foreign capital must be actively solicited.
The Bulgarian banking system can not currently support the
development of the SME market and other sources of funds, such as
the Ministry of Industryнs Small Business Fund, established in
1991, remain underutilized. Foreign investment in which effective
managerial control is established also serves to bring badly needed
technologies and managerial techniques to SMEs. Unfortunately,
according to data provided by BNB, foreign investments for the
first half of 1996 amount to USD 49 million, USD 27.6 million less
than the first six months of 1995.
Recommendation
To attract investment in SMEs from abroad, Bulgarian
policy makers must make Bulgaria an attractive investment for
international investors. This success relies heavily on the
creation of a national economic plan that stabilizes the economy
and the political system, privatizes existing SOEs, reduces
inflation, and basically builds a better economic climate for
investing. Recent political and economic events had diverted
foreign investors attention to other Central and Eastern European
Countries and foreign markets. In the midst of heavy competition
from other developing economies for foreign investment, the
availability of capital for aiding the SME sector from abroad may
be difficult to attract in large quantities. And therefore,
concrete actions must be executed under the umbrella of a
comprehensive national economic plan.
TAX MEASURES
Background
The most characteristic feature of the widely
accepted practice of carrying out state collections (taxes,
excises, tariffs, customs duties, and other duties) is its chaotic
nature. The inconsistent state policy in this sphere and the
actions of the administration bring about tax nihilism, rather than
the required tax culture and discipline.
Recommendation
To increase budget revenue, the priority tax policy
change must be the creation of a steady and predicable tax
environment. It is imperative to finally abolish the practices of
back dated taxes and the constant altercation of tax policies.
Expedient and decisive measures for tightening the financial
discipline must also be carried out, particularly in improving the
work of the tax administration and other financial control
authorities. Finally, as previously stated with respect to the
privatization of SOEs, prompt and resolute cuts in the losses of
the public sector must be completed thought mass privatisation.
Specific action must be taken to address the
following obstacles SMEs face because of current tax policy:
1. The regulation of the annual taxation results
(taxable and nontaxable expenses) is decreed by an act of the
Council of Ministers, which allows its easy and perpetual
revision;
2. The range of expenses which reduce the annual
amount to be taxed constantly diminishes;
3. The use of negative results from previous years
is no longer used in the formation of the positive financial result
for the current year;
4. A practice of accepting limitations introduced
with old dates is being widely accepted;
5. Only 10% of education expenses are accepted as
nontaxable expenditure, which is a serious drawback for SMEs, where
education is crucial to their survival and stabilization;
6. Expenses common to SMEs, such as the
reconstruction and office, machine, and other improvements are not
being reduced;
7. The process of advanced payment of taxes must be
developed and stabilized;
8. There is an incredibly slow procedure of
recovering VAT credit with no interest accumulation for blocked
funds;
An additional burden for SME activity is the
ineffective and inconsistent work of the tax authorities. In this
respect the following problems must be addressed:
1. Arbitrary interpretation of the laws and other
normative regulations by public officers;
2. Lack of control mechanisms for the structure of
the tax administration to be used by the MF in supporting the
interests of the economic entities;
3. In many cases, tax inspectors are hostile and
aggressive. Errors are sought deliberately, and a percentage reward
is given for every мerred amount.о
ACTIONS AGAINST SHADOW ECONOMIC AND
CRIMINAL ACTIVITIES
Background
During the last few years, shadow economies and
criminality have gained considerable influence within the Bulgarian
economy. Among other problems, inadequate tax policies have pushed
SMEs into shadow economics and entrepreneurs are being squeezed
between the so-called мpower organizationsо and high-level
institutional corruption. Thus, entrepreneurial spirit is being
destroyed by pseudo market conditions. These factors are also
extremely harmful to the activity of foreign investors. For
example, United States Federal racketeering laws prevent American
businesses and persons from engaging in activities such as bribery
outside the United States. Therefore if local business practices
include such activities as part of the modus operandi, American
businesses are effectively excluded from the market.
Recommendation
Resources need to be allocated to protect upstanding
businesses. The problems of corruption needs to be addressed by
both the state and local SME organizations. Educational programs
should be implemented within SME associations to inform member
companies of the economic benefits created in a business
environment which recognizes business integrity and mutual trust
among its members. Specifically, credible accounting procedures and
legitimate business practices provide opportunities to access
additional sources of long-term funding.
1.1.4 EXPECTED RESULTS
This action line will result in governmental
recognition of the important role of SMEs in the development of the
Bulgarian economy, outline the necessary macro-economic conditions
that are necessary for their development, and underline the
importance of including measures that specifically address the
needs of the SME sector in whatever macro-economic actions are
undertaken. The stabilization of the Bulgarian economy through an
anti-crisis program and accelerated privatisation program will lay
the foundations for the development of Bulgariaнs SME sector.
Additional business climate improvements will result from the
availability of financing from international sources, consistent
and enforced tax laws, and credible and legitimate business
practices. Ultimately, The SME sector will become a major
contributor to the economic growth of the country. Providing an
environment suitable for SMEs to conduct business will lead to the
creation of many new jobs necessary to absorb new unemployment
created by restructuring former SOEs, and will also serve to
redistribute income. SMEs will also provide an additional market
for the purchase second-hand equipment from SOEs. They will also
contribute to the success and efficiency of Bulgariaнs large
corporations by providing services that facilitate business. As a
result of these factors, the larger and more developed the
Bulgarian SME sector, the greater the SME contribution to the
growth of the economy.
1.2 ACTION LINE 1.2: POLICY FOR ENCOURAGING AND
SUPPORT OF
THE SMALL AND MEDIUM ENTERPRISES
1.2.1 BACKGROUND
The state administration has not implemented a
consistent, long term strategy for the creation of the appropriate
environment to promote SME development, and for the attainment of
competitive power and European standards. On the contrary, policies
are now in place that directly frustrate the development of the SME
sector. The ultimate effect of which is the continuous expansion of
corruption and lowering of legitimate entrepreneurial goals.
1.2.2 OBJECTIVES
The objective of this action line is to strengthen
the SME sector by creating institutions and policies designed to
provide direct support, unification, information and guidance
currently unavailable for SMEs. In light of the present economic
conditions, the needs of SMEs have become more pronounced and this
has resulted in an urgent need for the establishment of a
competitive environment in agreement with European standards and
regulations.
1.2.3 ACTIONS
The actions foresee:
1. the development of a clear definition of SMEs,
along the lines of those proposed by the European Union, through
which a proper framework of support for the SME sector can be based
(SME DEFINITION).
2. the building of an institutional infrastructure
for encouraging and supporting SMEs (INSTITUTIONAL
INFRASTRUCTURE).
3. the implementation of a consistent policy of
support measures and relieves for SMEs (SUPPORT SYSTEM).
4. the development of a program for the financial
assistance and relief for the SMEs according to the general
economic conditions in the country (FINANCIAL ASSISTANCE AND
RELIEF).
5. the development of a foreign economic policy for
the attraction of government support for the SME sector (FOREIGN
ECONOMIC POLICY).
SME DEFINITION
Background
Recent definition of SMEs under section 1.1
of the Law for the National Bank for Investing and Development is
as follows: Small size enterprises is defined as those enterprises
with no more than 50 employees and a balance value of its long-term
material assets not exceeding 5,000 times the national average
monthly salary. Medium size enterprise is defined as those
enterprises with no more than 100 employees and a balance value of
its long-term material assets not exceeding 10,000 times the
national average monthly salary.
The definition adopted by the European Commission is
as follows: SMEs are defined as enterprises which have fewer than
250 employees, and have either an annual turnover not exceeding ecu
40 million, or an annual balance-sheet total not exceeding ecu 27
million. When necessary to distinguish between small and medium
sized enterprises, a small enterprise is defined as an enterprise
which has fewer than 50 employees and has either an annual turnover
not exceeding ecu 7 million or an annual balance sheet total net
exceeding ecu 5 million.
Recommendation
The development of a clear and appropriate Bulgarian
legal definition of SMEs is needed through which a proper framework
of support for the SME sector can be based. This definition needs
to also incorporate to a large extent those definitions that have
been adopted by international institutions. Such a definition is
essential for two reasons. First, from a domestic standpoint, the
country needs to clearly define its SME sector so that Bulgarian
SME programs, policies and laws can be implemented with distinct
constituents. Second, from an international standpoint, there has
recently been significant international institutional recognition
and interest in the promotion of the SME sector as a means to
further development. Therefore, without a definition of SMEs that
incorporates international definition, Bulgarian SMEs may be
excluded from capital and assistance designated under international
definitions for SME development.
INSTITUTIONAL INFRASTRUCTURE
Background
A Bulgarian institutional infrastructure to support
and encourage the development of the SME sector is severely
lacking. Few public institutions authorized to carry out economic
functions have no special policy for SMEs. State and political
powers are aimed at creating formal governmental unions;
undermining the motivation to create independent unions. Lobbying
is either highly fragmented or reduced to serving personal and
narrow political interests.
Recommendation
Currently, the most feasible action to create
institutional infrastructure is one that demands minimal financial
expense but gathers governmental-wide support. The solving of this
problem is a question political will. The roles of both state and
private institutions must be addressed in the overall formulation
of a dependable institutional infrastructure.
A centralized structure requires the governmental
addition of an agency or commission to address the needs of SMEs.
The primary advantage of this approach is the consolidation of
information and resources into one мaddressо for entrepreneurs and
international investors to visit. However, the proliferation of
Bulgarian agencies has significantly reduced the efficiency of
specialized organizations. These problems are the result of
competition between the agencies, a lack of synchronized effort and
generally deficient agency regulation.
Equally important is the development of
self-organized SME associations, institutions and unions.
Maintaining independence provides the ability to exercise pressure
upon the state and allows them to run more efficiently. In creating
such bodies, it will be necessary that clearly defined policies
regarding state relations, forms of dialogue and use of their
expertise are created. In addition, criteria for the legitimacy of
business associations must be formulated and their independence
guaranteed.
SUPPORT SYSTEM
Background
From the viewpoint of the process of integration of
Bulgaria in the European economic marketplace, and of the weight
SMEs have in developed democracies, the formation of a competitive
environment has to become a priority in the strategy of the state.
This is an essential prerequisite for catching up with the European
standards. However, hostility of the state towards private business
has been displayed not only in its failure to create adequate,
coordinated support systems for the Bulgarian SME sector, but also
in its generally insulting political attitude and its lack of
desire for dialogue.
Recommendation
Once a clear anti-crisis program and a concrete
implementation of structural reform is underway, it will be
necessary to outline the spheres in which SMEs will use certain
privileges, advantages and concessions. This approach should be
legally decreed in the Public Procurement Law.
A common system of concessions and encouragement
measures for SMEs must be created which include the creation of
мbusiness incubatorsо to provide trade, financial and technological
information servicing; relieved procedures of registration,
licensing and administrative service; relieves for renting of
offices and working premises; training support; assistance in the
creation of associations and the creation of мinnovation polesо to
transfer technologies and act as mediators between the research
centers and SMEs. Appendix #1 lists alternative forms of government
assistance and support structures implemented in different
countries for the development of SMEs.
FINANCIAL ASSISTANCE AND RELIEF
Background
Although plans for the development of the Bulgarian
financial and insurance sectors are in progress, they lack a
consistent and coherent strategy for the support of the SME sector.
Absent adequate sources of capital, credit guarantees, insurance,
and other quintessential financial tools, the development of the
SME sector will continue to fail miserably. Fundamental to this
system is a viable banking industry, insurance and securities
industry, and pension and mutual funds that are capable of
supporting the needs of SMEs.
Recommendation
Concurrent with the aforementioned general
procedures for financial stabilization under Action Line 1.1, a
long-term agenda must be implemented for the financial relief of
the starting and strengthening of SMEs in light of a clear program
of structural reform.
In addition to the general restructuring of
financial institutions in which must exist a strategy to meet the
needs of SMEs, a special Fund should be created to provide, among
other things, credit guarantees for the SMEs, export insurance and
guarantees, partial financing of мbusiness incubators,о partial
financing of the innovation centers for SMEs, direct and indirect
financial support training and expansion.
In accordance with the already stated principles for
guaranteeing the independence of SMEs, this should be a mixed fund
with state and private participation. In addition, an active
foreign investment policy should focus in part on international
development sources of capital which could be designated for the
Fund. Concrete Fund policies, objectives and lending guidelines
will aid in the attraction of much needed development capital.
The Fund should also be structured on a regional
principle, with a certain regulated autonomy of regional
structures. This will create a competitive environment at an
inter-regional level, and provoke the municipality authorities into
providing support for the SMEs. The local social and business
structures will also be motivated to contribute for the
fund-raising.
Other financial support systems for SMEs that need
to be incorporated into the national policy for economic
development as it emerges are special state assistance for SMEs
operating in developing or poor regions; financial and tax
concessions for the introduction of technologies, establishment of
new working places, and improvement in the qualification of the
employees; systems for encouraging and guaranteeing risk
enterprises; normalization of the insurance system and the
introduction of specialized insurance techniques for SMEs; systems
for credit guarantees; and tax provisions that support large
corporations that act as мaccidental credit banksо for SMEs.
FOREIGN ECONOMIC POLICY
Background
Another element of public policy which hinders the
development of SMEs is the inadequate cooperation with the
international financial institutions. For example, the EBRD has
provided 90% of its support to the public sector and only 10% to
the private sector even though the bank was created to support the
two sectors proportionally 40% and 60%, respectively. With that in
mind, the European Union has also been reviewing its policies for
the support of developing economies and has recognized the
importance of allocating resources for the development of the SME
sectors. The lack of such a policy is especially emphasized when
regional cooperation is considered; SMEs could play an important
role in international cooperation.
Recommendation
The support for SMEs should be accented in the
countryнs foreign economic policy. Specific areas of concern are as
follows:
1. The attraction of aid for SMEs, both technical
and financial, should develop on a bilateral and multilateral
basis, and focus on international organizations and financial
institutions;
2. Special attention needs to be paid to SMEs in the
common system for the encouragement of exports (if such priorities
exist in the state);
3. Informational provisions and promotion have to be
developed such as the use of trade counselors at the diplomatic
missions.
4. Special provisions must exist for the inclusion
of SMEs in the schemes of international guarantees; and
5. The priority of SMEs in the development of
regional and international partnership must be emphasized.
1.2.4 EXPECTED RESULTS
The expected results of these recommendations will
be the creation of a support network and the removal of obstacles,
common to all private businesses, but particularly relevant to
SMEs. By providing SMEs with adequate representation and
acknowledgment through the creation of applicable government and
private support structures, the implementation of other supporting
strategies can commence. Common resource centers, either business
incubators or innovation poles, will provide information servicing
and coordination activities.
The final expectations of such projects are the
creation of a network of support institutions, policies and
programs that will make the Bulgarian SME sector competitive, both
domestically and in the international market.
2. ACTION LINE 2: IMPROVING THE INSTITUTIONAL AND
LEGAL ENVIRONMENT FOR SMALL AND MEDIUM SIZE ENTERPRISES
2.1 ACTION LINE 2.1: IMPROVING THE INSTITUTIONAL
FRAMEWORK FOR SMALL AND MEDIUM SIZE ENTERPRISES
2.1.1 BACKGROUND
Bulgaria has completed, by and large, building the
institutional framework to implement laws affecting small and
medium size enterprises (SMEs). Many government institutions were
in place before 1989. Others, such as the Constitutional Court, the
Supreme Judicial Council and the Committee on Protection of
Competition, have been created in the last several years and are
now functioning. Still, there remain gaps many of which are in
areas directly related to SMEs.
2.1.2 OBJECTIVES
The objective of this action line is to facilitate
the process of institution building and operation, so that a better
institutional framework for SMEs be put in place as quickly as
possible. Lack of institutions, such as a fully developed court
system, creation of a functioning notary public system and
development of a nationwide commercial registry system has a great
negative impact on the functioning of SMEs.
2.1.3 ACTIONS
The actions foresee:
1. the completion of the structuring of the court
system (COURT SYSTEM);
2. the creation of a private notary system
(NOTARY SYSTEM);
3. the creation of a nationwide commercial registry
system (COMMERCIAL REGISTRY SYSTEM);
4. improvement of the Committee on protection of
Competition efficiency (COMMITTEE ON PROTECTION OF COMPETITION
POWERS)..
COURT SYSTEM
Background
The Law on the Structure of the Judicial System was
passed in 1994. Several Constitutional challenges slightly revised
the law, although its major purpose -- to create a tier of courts
of appeal -- remains intact. Bulgaria has chosen a four-tier system
of courts to implement a three-instance procedure (that is, there
are four different courts and everyone is guaranteed a trail and
two appellate reviews). The Bulgarian Constitution required the
courts to be established by July 1992.
Recommendation
Politicians are responsible for implementing
existing court structuring legislation. Creation of the Courts of
Appeal should take place as soon as possible, for SMEs suffer the
most from the inoperable court system. Implementation of such
courts should be preceded, however, by the development of
procedural rules (administrative, civil and criminal) tailored to
meet the requirements of the new system. The development of
procedural rules is possibly an area for which court administrators
could work with experts coming from academia, the SME sector,
non-governmental organizations, and practicing judges and
lawyers.
NOTARY SYSTEM
Background
Like most countries, Bulgaria requires that real
estate and automobile transactions, mortgage executions and other
transactions take place before a notary public. The law also
frequently requires that signatures be notarized, dates or contents
of documents be verified or copies of documents be certified.
Transactions that require a notaryнes seal are usually invalid if
it is omitted.
While most of the rest of the world operates under
privatized notary systems, Bulgaria relies on a very limited number
of notaries who function as state officials. For example, in the
City of Sofia, with a population of 1.5 million and a huge
concentration of business, there are approximately one dozen
notaries. It is not uncommon to wait weeks or even a month to
execute a mortgage or buy real estate and even a simple
notarization of a signature usually takes over an hour. The
inoperable notary system has a stifling effect on SMEs because of
the cost, waste of time and the uncertainty that go with it.
The government introduced to Parliament a Draft Law
on Notaries. The draft law follows the model of Austria, Germany
and other European countries and provides for the development of a
private notary system. This law has been pending in Parliament for
more than two years now.
Recommendation
The Law on Notaries has been passed by the National
Assembly. With a private notary system transaction costs will
decrease, a private administration system will develop and
government will dispense with a burdensome responsibility. Now that
the law has been passed, the government should with experts coming
from academia, the SME sector, non-governmental organizations, and
practicing notaries and lawyers to expedite the implementation of
the law and education of notaries in working under a private notary
system.
COMMERCIAL REGISTRY SYSTEM
Background
To determine who owns what property, its type, size
or shape, or whether it is encumbered and to put people on notice
of these facts, governments create property registries. Like most
countries, Bulgaria requires that properties and information about
them be registered. While registries exist in Bulgaria, there is no
central system.
Information on real estate, for example, can be
found in any of over 100 registries located throughout Bulgaria. To
locate all property of a bankrupt debtor or learn of all property
owned and encumbered by a prospective borrower, creditors -- to do
their job properly -- are required to check each registry by
physically visiting each location. Do most creditors do their job
properly? No. It is nearly impossible, and thus, they are required
to accept additional risk.
There are also 29 commercial registries located
throughout the country. To conduct due diligence on the legal
standing of a prospective partner or purchase, one might be
required to visit a registry in Varna, Blagoevgrad, Russe -- or
almost anywhere else. This inconvenience makes conducting necessary
due diligence difficult and time consuming; the result is that the
due diligence is often not completed. Such inconvenience is not
necessary in a country the size of Bulgaria and in a modern era of
computer technology.
Recently, Parliament passed the Law on Registered
Pledges. It is a law critical to the development of SMEs, for it
increases their capability to provide collateral of higher value to
their possible creditors, thus increasing their access to credit.
The Law on Registered Pledges provides for a central pledges
registry with the Ministry of Justice. Creating the registry
institution is critical for putting the new law in operation.
Through the central registry both debtors and creditors will be
able to make security interests public, secure priority of security
interests and safeguard against relying on property already
encumbered by third partiesн security interests.
In general, registry information is difficult to
obtain. Officials do not have proper understanding of the concepts
of freedom of information and oftentimes create (voluntarily, or
not) obstacles to free acces to information. That has worst effect
on SMEs who often lack the capacity to hire lawyers and consultants
and have to fight the bureaucratic obstacles themselves.
Recommendation
Ultimately, Bulgaria should create a system of
computerized central registries. Such a project is ambitious and
will take time and money. Focus should be placed first on creating
the central pledges registry as a fully computer-based registry
with a central database and numerous terminals, and operating under
a simplified administrative procedure. The experience from creating
and operating this registry should be studied carefully and carried
over to other existing or future registries.
One action that can be taken in the short term,
however, is to create uniform formats for national computer
databases. When such formats are developed, they can be made
available to local registries that can begin recording information
according to the standardized national form. When a national
computer system is developed, the locally produced information
should be easily transferred to the national system.
In general, free access to information should be
adequately provided for by law, so that looking for and finding
publicly available information is made quick and easy. EU First
Council Directive of 9 March, 1968, regarding public availability
of commercial registry information needs to be observed.
COMMITTEE ON PROTECTION OF COMPETITION POWERS
Background
The Committee on protection of Competition has been
in existence for over five years now. Unfortunately it has
demonstrated a high level of inefficiency, for the powers provided
to it by law are insufficient to let it tackle problems like
counterfeiting of goods, monopoly position, IPRs infringements,
etc.
Recommendation
The Committee on Protection of Competition must be
provided with more and more clear-cut powers which would allow it
to take direct action against agents of unfair competition
practices. The current approach, where the Committee is only
authorized to take court action against violators, must be
abandoned and substituted for by direct administrative powers.
Thus, SMEs will be better protected against strong monopolies
remaining from the communist economy period and against producers
and importers of counterfeited goods.
2.1.4 EXPECTED RESULTS
Implementing institutional reform will have a
boosting effect on the development of SMEs. The cost of running
business will be significantly decreased by reducing the time and
effort necessary to resolve legal disputes or to perform routine
operations, such as notarizations and due diligence on registry
information.
2.2 ACTION LINE 2.2: IMPLEMENTING EXISTING LAWS
AFFECTING SMALL AND MEDIUM SIZE ENTERPRISES
2.2.1 BACKGROUND
Bulgarian Parliament has passed a number of laws
relevant to the activity of SMEs that have not been effectively
implemented yet. Some times this is due simply to lack of relevant
experience among implementing officials and representatives of SMEs
(e.g., bankruptcy). Other times implementation also requires some
institution building beforehand (e.g., registered pledges). In a
number of cases legally fixed implementation procedures slow down
the implementations (e.g., privatization). In all such cases SMEs
suffer due to the inability of institutions and private sector to
implement, or act under, laws that are the result of already
existing political consensus in society. Such laws are national
capital that is being wasted by failure to use, resulting in loss
of thousands of opportunities for SME development.
2.2.2 OBJECTIVES
Appropriate actions should be taken towards
implementing existing and non-implemented legislation. Each sector,
private and public, must go their part of the way and get educated
about how new laws function in order to obtain the desired results.
A lot of joint work needs to be done, as well, if interaction among
SMEs and public institution is to appear and bring to life new
social mechanisms and functions.
2.2.3 ACTIONS
The actions foresee:
1. the implementation of bankruptcy legislation
(BANKRUPTCY LEGISLATION);
2. the implementation of registered pledges
legislation (REGISTERED PLEDGES LEGISLATION);
3. the implementation of privatization legislation
(PRIVATIZATION LEGISLATION);
4. the implementation of intellectual properties
rights legislation (IPRs LEGISLATION);
5. the implementation of securities regulation
legislation (SECURITIES REGULATION LEGISLATION).
BANKRUPTCY LEGISLATION
Background
Liquidation and reorganization procedures are common
features of developed market economies and are viewed as essential
to the functioning of an efficient economy. Such procedures can
also be used as methods of privatization. In August 1994, the law
on bankruptcy came into force. The law allows for restructuring or
liquidating insolvent companies.
Bulgarian courts and practitioners are somewhat
experienced in insolvency law. Reorganization, however, is
different. Few reorganization cases have been filed under the new
law (and were not provided for under the old) and courts,
practitioners, creditors and debtors will likely suffer because of
initial inexperience.
Implementation of the law is often hindered by
judicial and practitioner inexperience and government attempts to
save some large companies whose liquidation or even reorganization
will boost social discontent and unemployment.
Recommendation
Bankruptcy courts and practitioners need to be
trained in the intricacies of reorganization law. This training
could be accomplished by traditional seminars and the мнhands-onом
experience of participating in test reorganization cases. An
appropriate company could be identified for reorganization and
taken through the process with training teams of appropriate
judges, lawyers, trustees, creditors and debtors.
A large number of expected bankruptcies will most
likely inundate Bulgariaнпs fledgling bankruptcy court system. To
prevent overwhelming of the system -- and accompanying delay --
steps should be taken now to develop court technology including
databases to inform courts, practitioners and the public of the
status of pending bankruptcies. If such information is readily
available, courts and practitioners will be able to better perform
their jobs and public resistance to bankruptcy may decrease as some
of its benefits become apparent.
REGISTERED PLEDGES LEGISLATION
Background
In early November Parliament passed a new Law on
Registered Pledges. Undoubtedly, this Law will greatly enhance the
development of bank financing and other credit which will, in turn,
positively affect SMEs. The implementation of this Law, however, is
going to require hard and extensive preparatory work: designing of
a registry institution; designing of a fully computerized,
paperless registry system; implementing a reliable
telecommunications system connecting the central database with
local terminals; training registry officials into the
implementation of a registry system run by administrators, not by
judges. In this effort, the government will have to rely a lot on
private businesses in the fields of telecommunications, computers,
information technologies, personnel management and others. The
successful implementation of the central pledges registry will not
only enable the implementation of the Law on Registered Pledges --
it will also serve as a pattern in designing future registries and
reforming existing registries. The central pledges registry might
become the core institution of a future merged registry for
registering real estate transactions, commercial companies and
other elements of a healthy SME legal environment.
Recommendation
The Government, in the face of the Ministry of
Justice, should invite proposals from relevant experts from
business and academia, in order for it to design a modern and
workable registry which could also serve as a model in reforming
the registry system of Bulgaria. Legal experts drafting the
secondary legislation which will govern the registry institution
and procedures must work closely with technical experts. Once the
technical facilities and the proper legal framework are in place,
future registry officials and staff must be trained into running
the registry. SMEs, banks and other private entities possibly to be
affected by the new system should be educated, as well. The efforts
of the Government, the SME sector and non-governmental
organizations need to be coordinated to achieve a maximum effect of
training.
PRIVATIZATION LEGISLATION
Background
Bulgaria adopted a system of mass privatization in
June 1994. This supplements a market privatization scheme that was
adopted in April 1992. However, Bulgaria has become known
internationally for its slow and insignificant progress towards
privatizing its industry. Obviously, an efficient privatization
system will increase opportunities for SME creation and
development. The undergoing first round of mass privatization
demonstrated what a potential there is in converting existing state
owned medium and small businesses into private SMEs. Market
privatization holds the same potential. Successful implementation
of privatization legislation will result in a big step towards
creating a strong and significant SME sector in Bulgaria.
Recommendation
This paper will suggest the rather obvious point
that Bulgaria should pursue all privatization options including
mass privatization, market privatization, combinations of the two
and other methods such as bankruptcy liquidation. Special attention
needs to paid to implementing secondary legislation which
oftentimes has the effect of stalling the privatization process.
Special rules need to be designed for shortening the duration of
privatization transactions development and completion. An open
public dialogue needs to be initiated where SMEs, lawyers and
economists from the private sector may discuss expedition
techniques with the government.
INTELLECTUAL PROPERTY RIGHTS (IPRs)
LEGISLATION
Background
Bulgaria had become known for its lack of support
and protection of IPRs. However, the government took quick and
adequate action and nowadays Bulgaria is among the countries with
most modern and complete legal framework for the protection of
IPRs. Dspite new legislation, the rate of IPRsн violation still
continues to be high.
Recommendations
IPRs legislation needs proper enforcement. Officials
in IPRs enforcement agencies need to be traind in how to act in a
more eficient manner against violators. Owners of IPRs need to be
educated in the field of applying protection measures against
violators. Better protection of IPRs will help the SME sector in
two ways. SMEs which are owners of IPRs will receive protection.
The image of the emerging SME sector as a generator of IPRs
violation will radically improve.
SECURITIES REGULATION LEGISLATION
Background
New securities regulation legislation has been
passed. Its first year of implementation demonstrates that the
greatest hardships in its implementation are sourced in the lack of
proper infrastructure of the capital market.
Recommendation
Work for the creation of a proper infrastructure of
the capital market. The creation and proper provision for a central
depository for securities is critical to setting up the markt. Same
is true about securities exchanges. Well developed capital markets
are vitally important for SMEs and the SME sector will strongly
benefit from a developed capital market.
2.2.4 EXPECTED RESULTS
A lot of time, public energy and capital has been
invested in creating new modern legislation. This investment
continues to stay dormant while the Bulgarian SME sector suffers
from lack of appropriate legal framework. This results in a
multiplication of the loss to society as a whole. Bringing to life
newly passed legislation as soon as possible will utilize a lot of
investment that has been made by Bulgarian society and will sharply
improve the legal conditions for SMEs and will increase the size
and vitality of the emerging SME sector.
2.3 ACTION LINE 2.3: DRAFTING ADDITIONAL LAWS
AFFECTING SMALL AND MEDIUM SIZE ENTERPRISES
2.3.1 BACKGROUND
Many steps have been taken towards creating an
enabling environment for SMEs, many of which have been completed
and some of which still need to be finalized. However, there is
still a number of laws that need to be drafted in the near
future.
2.3.2 OBJECTIVES
This paper does not have the purpose to propose an
exhaustive list of laws that need to be drafted in order for the
legal framework for SMEs to be completed. It just suggests certain
important pieces of legislation which, no doubt, are necessary for
the development of the SME sector.
2.3.3 ACTIONS
The actions foresee:
1. the drafting modern foreclosure legislation
(FORECLOSURE LAW);
2. the drafting amendments to leasing law
(LEASING LAW);
3. the drafting consumer protection laws
(CONSUMER PROTECTION LAW);
4. the drafting electronic commerce legislation
(ELECTRONIC COMMERCE LEGISLATION);
5. the drafting modern currency exchange legislation
(CURRENCY EXCHANGE LEGISLATION);
6. passing specialized legislation on SMEs (SME
LEGISLATION)
FORECLOSURE LAW
Background
Foreclosure is a difficult process in Bulgaria.
Confidence in the legal mechanism for enforcing rights is low and
private мнenforcementом and racketeering groups flourish. The
result of the difficult foreclosure process is that commercial
turnover slows down. Businesses attempt to avoid situations where
money would be owed to them for fear that commitments will not be
honored and enforced.
The existing foreclosure law does not recognize or
allow for non-judicial methods of foreclosure (with the exception
of the newly passed Law on Registered Pledges which, when it takes
effect, will only allow out-of-court foreclosure on pledged movable
property). Every creditor who has procured a writ of execution,
regardless of whether it is a secured creditor, must go through a
lengthy judicial process. Sale of a debtorнпs assets must be
effected at a court appointed auction. The initial auction price
must be determined by a court appointed expert. If a creditor must
foreclose on a combination of real estate and chattel, this must
happen in two different procedures which do not necessarily run
parallel in time. Debtors are not allowed to bid and creditorsнп
rights to bid are limited. Foreclosure on bank accounts is
practically unworkable. Steps need to be taken so that the law will
enable creditors to easily obtain information about the existence
and location of bank accounts.
The foreclosure playing field is tilted in favor of
the debtor. Debtors have numerous opportunities to prolong the
procedure. Fines for violation of procedural rules are outdated and
low and do not deter procedural violations. Even when, after a
lengthy process, the court has scheduled an auction, a debtor --
whose assets may exceed the value of the creditorнпs claim -- may
delay the process by another two years. If before the auction
occurs the debtor pays 20 percent of the claim and commits to pay
ten percent every quarter, foreclosure is stopped. The result can
be that a poor creditor is forced to accept payments over a
two-year period from a wealthy debtor.
Written to service a 1952 command economy, the law
is unsuited for 1994 market. It is true that SMEs will appear
mostly as debtors and an efficient foreclosure procedure at first
sight appears to be detrimental to their interests. However, an
efficient foreclosure procedure will enhance lending and SMEs will
ultimately benefit from a more stringent legal framework applicable
to them.
Recommendation
Organize a working group to draft and lobby for
passage of a modern foreclosure law. The government will perform
much better in providing a workable foreclosure legislation if it
works closely with banks and other private businesses. By far,
private businesses and banks are the ones who suffer most from the
current foreclosure framework and could propose suitable solutions
to most of the existing problems. In this way it will be guaranteed
that no problems will be left unresolved, as well.
LEASING LAW
Background
Leasing is used in western economies as an effective
means of мpay as you goо financing. It is particularly attractive
for SMEs. Bulgaria has a long tradition -- over ten years -- of
leasing relative to its Central European neighbors.
Leasing transactions were recently provided for in a
newly passed division of the Law on Commerce. Still, certain
problems remain which inhibit the development of leasing as a
financial method.
Under VAT, finance transactions are tax exempt.
Finance leasing transactions (where, simply put, money is borrowed
to finance the purchase of equipment), however, are not classified
as finance transactions under Bulgariaнпs VAT law. The result is
that a finance lease cannot compete with a finance loan. This is
because when a buyer makes a purchase with a loan, it pays VAT on
the purchase price of the product, but it does not pay VAT on the
мнcostом of the loan (the lenderнпs interest rate). When a buyer
(or lessee) makes a purchase with a lease, however, it pays VAT on
the мнcostом of the lease (the lessorнпs profit).
Furthermore, a lender is not required to acquire the
financed product and pay VAT on the purchase price. A lessor is. It
pays 18 percent of the price of the goods to VAT. While the lessor
eventually gets a refund, it is not paid interest on its refund and
it must go through a complicated refund process which costs it (and
the state) time and money. The process is complicated and expensive
for both the lessor and the state and the cost is not justified
because the state cannot expect to make a gain.
Demand for financial leasing should be high in
Bulgaria primarily because (1) the country faces a lack of
financial resources for starting businesses, (2) suitable financing
is difficult to obtain from Bulgarian banks and (3) the process for
obtaining bank loans is usually long and arduous.
Leasing has been used in Bulgaria since 1989 as a
quasi method of privatization. In typical a rendre agreements,
state-owned properties -- most of them green grocers or other
retail outlets -- are leased -- usually to business employees. | 
