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1.2 ACTION LINE 1.2: POLICY FOR ENCOURAGING AND
SUPPORT OF THE SMALL AND MEDIUM ENTERPRISES
- 1.2.1
BACKGROUND
- 1.2.2
OBJECTIVES
- 1.2.3
ACTIONS
- SME
DEFINITION
- INSTITUTIONAL
INFRASTRUCTURE
- SUPPORT
SYSTEM
- FINANCIAL ASSISTANCE
AND RELIEF
- FOREIGN ECONOMIC
POLICY
- 1.2.4 EXPECTED
RESULTS
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 to establish a competitive
environment in agreement with European standards and
regulations.
1.2.3 ACTIONS
The actions foresee:
- 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).
- the building of an institutional infrastructure for
encouraging and supporting SMEs (INSTITUTIONAL
INFRASTRUCTURE).
- the implementation of a consistent policy of
support measures and relieves for SMEs (SUPPORT SYSTEM).
- 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).
- the development of a foreign economic policy for
the attraction of government support for the SME sector (FOREIGN
ECONOMIC POLICY).
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SME DEFINITION
Background
Recent definition of SMEs under section 1.1 of the
Law for the State Bank for Investment 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. In addition, to be classified as an SME,
an enterprise must also conform to the criterion for independence
which states that independent enterprises are those which are not
owned as to 25 per cent or more of the capital or the voting rights
by one enterprise, or jointly by several enterprises, falling
outside the definition of an SME or a small enterprise, whichever
may apply.
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.
In light of the European agreement for association
and subsequent commitments, legislation must be harmonized with
that of the EC. As such, it is necessary to include the
independence criterion in the Bulgarian definition of an SME. The
lack of this criterion creates a situation in which a Bulgarian
holding company or other economic associations could be established
and receive the benefits of a SME status.
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 a 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 "address" 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. It should be noted that
while a government agency may have certain advantages, such as deep
pockets, access to information, and hopefully, legislative support,
such institutions are often subject to significant political
pressures. Political concerns often hinder the free flow of
information and resources to businesses in the form of lack of
funding, restrictive policies, and government programs that support
or discriminate against particular sectors of the economy.
As a result, it has become increasingly important to
develop self-organized SME associations, institutions and unions
that provide similar assistance that would be found at government
agencies. 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.
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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.
However, when implemented, SME programs have proven
successful. Two such programs are administered by the Ministry of
Industry and funded by PHARE. The Ministry of Industry established
regional development agencies in Burgas and Smolyan to provide
seminars, training programs, consulting, information servicing and
project funding, such as a tourism development project in Burgas.
In addition, two business centers were created in Russe
(transportation) and Plovdiv (food industry), to assist in the
development of those economic sectors. Other Ministry of Industry
programs include financial support of entrepreneurs in the
participation of international business events and a company
support program to provide expert assistance in the areas such as
market research and business planning.
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
"business incubators" 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 "innovation poles" 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.
The basic idea of state assisted centers of business
development and technological transfer is the exploitation of
synergy effects through the horizontal and vertical co-operation
between firms. The networking and clustering of firms can
contribute to a reduction of costs for individual enterprises, both
though the introduction of work-sharing processes and also, in the
area of overheads, through the common usage of business-related
infrastructure.
Further, support institutions should be linked with
international support programs, such as the Firm Level Assistance
Group ("FLAG"). FLAG is a consortium of seven organizations that
provide volunteer experts, consultants, trainers and US study
trips. Attention needs to be made to develop mutually beneficial
relationships between Bulgarian support institutions and
international programs by providing linkages between those
enterprises that need technical assistance and those organizations
that are looking to supply it. Such efforts will increase the
effectiveness and penetration of already successful programs, such
as FLAG.
Access to new technologies and advanced know-how has
become an essential component of economic competitiveness,
particularly for SMEs. In this respect, the existence of an
adequate information program or infrastructure for the
dissemination of research and technological developments on a
national and international level is of great importance. An example
of such an infrastructure is the network of 52 innovation relay
centers in the European Union Members States, which commenced
operations in late 1995. These centers promote innovation by
bringing research and technology closer to companies, especially
SMEs, and by encouraging the participation of additional industry
and research centers in the European RTD programs. In Bulgaria,
such a center is now being established under the INCO-COPERNICUS
Program of the EU. The Fellow Member to the Community Innovation
Relay Center ("FEMIRC") is an alliance between two government
agencies, the Ministry of Industry and the Agency for Economic
Coordination and Development, and the Applied Research and
Communications Fund, the Bulgarian Academy of Sciences and the
Bulgarian Industrial Association. Through FERMIC's services,
Bulgarian SMEs will receive information and advice on RTD programs,
funding opportunities, and the use of RTD results; consultancy on
the development of proposals for specific projects and direct
assistance in partner searches; and technological assistance,
including the identification of external technology suppliers and
in the absorption of new technologies.
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 financial and credit 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 "business incubators," 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 could be a mixed fund
with state and private participation. For example, the capital for
the fund could be supplied from the government, while the
administration of the fund could be sub-contracted to private
enterprises. In addition, if private funds are solicited for the
Fund, private pressures could help to alleviate governmental
political pressure that undermines the effectiveness of the fund.
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 "accidental credit banks" for SMEs.
Finally, it is extreamly important to remove legislative burdens
that prevent the formation of enterprise funds, foreign and
domestic, to supply additional funding to SMEs.
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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
country’s foreign economic policy. Specific areas of concern are as
follows:
- 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;
- Special attention needs to be paid to SMEs in the
common system for the encouragement of exports (if such priorities
exist in the state);
- Informational provisions and promotion have to be
developed such as the use of trade counselors at the diplomatic
missions.
- Special provisions must exist for the inclusion of
SMEs in the schemes of international guarantees; and
- 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.
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