CENTER FOR THE STUDY OF DEMOCRACY
Draft Policy Paper
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 AGAINSTSHADOW 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 |