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Bulgaria - Country Guide

Market Overview

Bulgaria's commercial climate offers political stability, strong economic growth, a highly qualified work force, strategic location and low costs. While the domestic market is relatively small, Bulgaria is an excellent launching pad for sales into the European Union, Russia, Turkey and the Middle East. Bulgaria joined NATO in 2004 and plans to join the European Union (EU) in 2007.

The general attitude in Bulgaria is pro-international and the Bulgarian market is receptive to overseas goods and services. The current government, elected in June 2001, includes a large number of western-educated Ministers and Deputy Ministers who are supportive of expanding EU-Bulgarian trade relations. The government is committed to a conservative fiscal policy resulting in low inflation, a consolidated budget deficit around 0.5 percent, declining external debt and a stable foreign exchange. The government has cut personal income and corporate tax rates, and abolished taxation on capital profits in the bond and securities trade.

Market Challenges

The EU countries are now Bulgaria's main export destination (56%) and a major source of foreign direct investment (67%). The Association Agreement between Bulgaria and the EU, a prelude to eventual EU membership, enables most goods to move between these two parties at zero, or close to zero, tariff rates. This can be an advantage to EU companies with production facilities in Bulgaria intended for export into the EU, but a disadvantage for EU exporters with European competitors. While the commercial climate is, in general, very positive, there still are factors that inhibit EU-Bulgarian trade and investment. Unemployment and low wages limit consumer purchasing power. The judicial system is inefficient and sometimes corrupt, and organised crime influences some sectors of the economy. Government bureaucracy is improving, but still presents frustrating delays and unreasonable burdens for investors and exporters.

Market Opportunities

Market access for EU companies has improved significantly. Bulgarians are eager to have greater access to EU goods and services, and there are excellent opportunities for those companies willing to enter this expanding market.

A number of investment incentive programs recently implemented include tax breaks in the newly created industrial zones and significant government assistance corresponding to the level of investment.

Good prospects for exports to Bulgaria include the following sectors (in alphabetical order): automotive parts and services, construction equipment and building products, food processing equipment, information technology, telecommunications, defence, energy, medical products, pollution control equipment and services, and tourism infrastructure. Bulgaria is planning a number of major infrastructure projects including bridges, highways, port development, airport modernisation, energy generation and distribution, and water and waste treatment facilities. Privatisations continue in the energy and entertainment (film production) sector, and plans for privatisation for the national airline and commercial fleet are being discussed.

International financing of major infrastructure projects remains essential, and Bulgaria is still very dependent on financing from multilateral banks and other non-Bulgarian sources. The government has passed reforms that have made the tender process more open and transparent.

Market Entry Strategy

Finding a good local representative is key to a market entry strategy. Conducting due diligence before selecting a representative is also essential.

Political and Economic Environment

ECONOMIC ENVIRONMENT

Since taking power in July 2001, the government of Prime Minister Simeon Saxe-Coburg has maintained its predecessor's focus on macroeconomic stability, while keeping a political eye on continued high (albeit declining) unemployment and low incomes. In addition to pursuing macroeconomic stability as its first priority, the Government is taking further steps to attract foreign investment and stimulate growth. The Bulgarian Government has delivered strong, steady GDP growth in real terms. Bulgaria’s economic expansion has accelerated in 2004 with estimated real GDP growth surging to 5.3 percent. This pace of growth makes Bulgaria one of the fastest growing economies in Europe. Official statistics underreport economic activity, with an unofficial market possibly representing an additional 20 to 30 percent of the official GDP. Economic growth, however, particularly in Bulgaria’s private sector, has not been rapid enough to drastically reduce unemployment. Registered unemployment has declined due to fewer lay-offs and to the Bulgarian Government’s job creation programs, but remains high at 12.67 percent for 2004. The GOB has taken steps to improve Bulgaria's business environment, moving forward on structural reforms, privatisation, and enterprise restructuring, while maintaining a tight fiscal policy.

The Currency Board provides fiscal discipline, while balance of payments support from international donors help Bulgaria fund transitional costs of economic reform and public investment. Thanks to the Currency Board Agreement and its associated IMF programs, inflation was cut from nearly 600 percent in 1997 to only one percent in 1998 – and for 2004 was 3.9%. Bulgaria's balance of payments situation is currently stable, but its future sustainability depends on new foreign direct investment and a lower trade deficit. Domestic demand has substantially increased, sustained by a credit boom. Continued fiscal discipline and GOB measures to encourage slower credit growth should limit future current account deficits.

With national elections coming in June, the main area of concern about Bulgaria’s economic outlook is restraining extra-budgetary expenditures. Other issues include structural reforms in subsidised sectors (notably health, education, energy, and railroads), and allocation of larger sums to public investment to meet EU infrastructure standards, such as in transportation, environmental protection, and water treatment.

POLITICAL ENVIRONMENT

Major Political Issues Affecting the Business Climate

The National Movement Simeon II, political vehicle of the former exiled Tsar Simeon Saxe-Coburg, in 2001, won 120 seats (half of the 240 seats in Parliament) and formed a coalition government with the Movement for Rights and Freedoms, which is generally seen as representing Bulgaria's ethnic Turkish minority. The Saxe-Coburg government has continued the reform policies initiated by the preceding government, which lead Bulgaria out of the 1996-97 economic crisis; however, reforms have not born fruit as quickly as many had hoped.

Organised crime and corruption are a concern of both the government and the ordinary citizen, and are significant domestic issues. Many organised crime killings have gone unsolved in the past years and judicial corruption is reputedly widespread. Government procurement and privatisation procedures remain susceptible to corruption. Violent crime against persons is very low although property crime - car theft, pick pocketing and burglary - remains widespread.

All major political parties support membership in Western institutions, including NATO and the European Union (EU). Bulgaria is expected to sign a EU accession treaty in April 2005 with a view toward joining the Union in January 2007. The Bulgarian Government has cooperated closely with the EU as a non-permanent member of the UN Security Council in 2002-2003 and as Chairman in Office of the Organisation for Security and Cooperation in Europe (OSCE) in 2004. Bulgaria has also supported EU and NATO positions during the Kosovo Crisis and in the War on Terrorism after September 11, 2001. Bulgaria has deployed troops to Bosnia (EUFOR), Kosovo (KFOR), and Afghanistan (ISAF and OEF). A Bulgarian battalion is currently deployed in Iraq as part of the multinational coalition forces there. The government hopes that membership in NATO and the EU will encourage foreign investment and promote greater confidence in Bulgaria’s political and economic institutions.

Political System, Schedule for Elections, and Orientation of Major Political Parties Following the removal of long time communist leader Todor Zhivkov in 1989, Bulgaria has been a parliamentary republic ruled by a democratically elected government. A new constitution was enacted in 1991, which lays out the basic rights and obligations of citizens and is the basis for Bulgaria’s legal system. The constitution guarantees freedom of association including the right to form political parties.

The constitution provides for the separation of powers amongst the executive, judicial and legislative branches and a system of checks and balances. The President is the head of state. The presidency is empowered to conclude international treaties and to schedule parliamentary (i.e., National Assembly) elections. The President is also the commander-in-chief of the armed forces. The National Assembly is a unicameral legislative body that consists of 240 members who are elected for a term of four years. Georgi Purvanov of the Bulgarian Socialist Party (BSP) won an upset victory over incumbent Petur Stoyanov of the UDF in the November 2001 presidential election. He assumed the presidency in January 2002 for a five-year term. Presidential elections are expected in November 2006.

Simeon Saxe-Coburg Gotha, the former Tsar (Simeon II) who had lived most of his life in exile in Madrid since leaving Bulgaria as a boy after World War II, became Prime Minister on July 24,2001. His Government includes representatives of the National Movement Simeon II (NDSV) and the mainly ethnic-Turkish Movement for Rights and Freedoms (MRF). The UDF and the BSP are the main opposition forces. The next major test for the political parties will be the general elections due in June 2005.

Selling EU Products and Services

Using an Agent or Distributor

EU exporters, especially small- and medium-sized enterprises, generally choose to enter the Bulgarian market through an agent or distributor. This is because the small size of the Bulgarian market, as well as language, cultural, and other differences will make it difficult to set up a branch or subsidiary at the outset. Even some well-known large American companies are currently represented in Bulgaria by an agent for these reasons.

In considering a potential agent or distributor, common sense prevails: a EU company should not automatically sign up the first Bulgarian company that contacts them, and a due diligence background check of a potential business partner, plus frequent visits by the export sales manager, are essential.

Bulgarian law stipulates that representation in court and before administrative agencies must be performed by a duly licensed member of the Bulgarian Bar Association, who are independent practitioners in law firms or who are certain employees of corporations. Bulgaria does not allow foreign lawyers to practice in Bulgarian courts, except in criminal cases while accompanied by a Bulgarian lawyer, on a reciprocal basis by agreement with the other country. In the case of a corporation, representation may be either by an authorised senior executive of the firm such as executive director, or by an employee who has passed the practical examination of the Ministry of Justice and who has a power of attorney from the corporation to represent it as “in-house counsel."

A Bulgarian patent representative who specialises in intellectual property rights and who is admitted to practice before the Bulgarian Patent Office is also essential for preparing documents to protect intellectual property rights. Some lawyers are patent representatives. Other services such as filing of corporate documents with the courts, legal opinions, and legal consultations, are in practice performed by self-styled “legal consultants” whose qualifications and experience may vary widely as the field is entirely unregulated. Some legal consultants may be former in-house counsel. Attorneys who are members of the Bulgarian Bar Association also provide such services. Additionally, some of the larger international accounting and consultancy firms have established legal departments, which perform some of the services offered by a law firm.

Establishing an Office

The Law on Encouragement of Investments (substantially overhauled in 2004) sets forth preferential treatment measures for foreign or local investments. The measures are differentiated according to the class of the investments, and include three levels of benefits, depending on the amount of the investment.

Franchising

The first franchise operations in Bulgaria were little more than stores or distribution licenses for trademarked products. Now KFC, Pizza Hut, Dunkin Donuts and other food services are commonplace and services like executive recruiting operate in Bulgaria. The Bulgarian retail market is now ready for the many products and services that are typically marketed and sold in foreign-based franchise stores. Bulgarian consumers are looking for retailers that can provide a consistent selection of quality products, reasonable prices and good service. Bulgarian entrepreneurs are also eager to obtain transfer of technology and management expertise.

The best franchise opportunities are in the big cities (Sofia, Varna, Plovdiv, Burgas) where the population has a relatively high level of disposable income. Sectors with the most potential for EU franchisors include automotive products and services, restaurants, hotel and motels, laundry/dry-cleaning, and employment services. Good franchise opportunities also include convenience stores, ice cream/yogurt stores, hardware stores, printing and photocopying services, specialty retail stores, commercial and residential cleaning, equipment rental centers, eye care and optical centers, baked foods, candy and snacks, and educational services.

The Bulgarian legal system accommodates franchise agreements. Laws on labor relations are clearly spelled out, leases can be freely negotiated, and laws protect trademarks, patents and copyrights. The primary challenge in establishing franchises is obtaining sites. In urban areas, especially Sofia, it is sometimes difficult to locate and lease properties at an affordable cost. Difficulties finding locations with clear titles create complications and delays in finding sites. The International Executive Service Corps (IESC) works with Bulgarian companies, matching them with potential EU franchise owners. In addition, there is a Bulgarian Franchise Association.

Direct Marketing

Direct marketing is relatively new to Bulgaria. There are few, if any, Bulgarian mail-order catalogs. Vacuum cleaners and cosmetics are being sold fairly successfully door-to-door. Companies employ different marketing techniques. An Austrian company is currently using television home shopping "infomercials" to sell kitchen tools and appliances not available in local shops. Home demonstrations are not popular and have generated little success. Avon and the Swedish company Oriflame report success in the direct sale of cosmetics.

Limitations to expansion of telemarketing are low telephone penetration in rural areas and unreliable mail deliveries. Direct marketing techniques may have more relevance to larger urban areas as the population of smaller towns is suspicious of direct marketing to end-users, and in less populated areas where contact between people is infrequent, door-to-door selling is viewed as a way to socialise.

Direct marketing through catalogs, telemarketing and the Internet from the United States to Bulgaria is still quite difficult. Few Bulgarians have credit cards, and debit cards are just now coming into popularity. Together with the low purchasing power, the high cost of shipping and lack of security for parcels and mail at most homes, catalog shopping and Internet shopping from the United States is in its infancy. However, e-commerce is expected to grow in Bulgaria over the long term.

Joint Ventures/Licensing

There are several laws that govern joint ventures with foreign participation, including the Law on Encouragement of Investments, and the Commercial Code. Joint ventures with state-owned companies (i.e., wholly owned by the Bulgarian State) must be approved by the Council of Ministers or by the relevant minister. The negotiation phase usually addresses the evaluation of existing assets and contribution of the foreign partner. The foreign contribution can be in cash and/or in-kind, for example know-how. The contribution of the local partner is usually in long-term assets (i.e., existing equipment, facilities, etc.). Joint ventures with private companies do not follow the same procedures. No government involvement or approval is necessary. After completion of negotiations, the entity must be registered with the appropriate district court. Joint ventures are subject to the provisions of the Law on Protection of Competition regulating concentration of economic activity.

Selling to the Government

Public procurement laws have been substantially revised to comply with EU rules and practices. Modifications have streamlined enforcement of the laws, strengthened the powers of the procurement staff and introduced controls. Public procurement opportunities are published on the web at www1.government.bg/rop

A new (April 2004) Public Procurement Law will be enforced beginning in October 2004. The Law established a Government Procurement Agency www.aop.bg, responsible for public procurement and reporting to the Minister of Economy. The new law also will give preferences for the Bulgarian small and medium companies until 2007 on public tenders.

Public procurement financed by international financial institutions such as the EBRD or World Bank offers the best opportunity for transparent purchasing decisions based on price and other competitive factors. Pursuant to the loan guidelines, tenders must be open and transparent. Results of the tender evaluation process are subject to the review and final approval of the financing institution.

Distribution and Sales Channels

Big changes to Bulgaria's retailing structure started in 1999, when the German firm METRO, the second-largest retailer in the world after Walmart, opened its first cash-and-carry membership store in Sofia. METRO carries a wide variety of direct-imported consumer items, including many EU brands. METRO has expanded throughout Bulgaria, and its entry into the market has been followed by the Greek consumer goods chain store Ena, the German/Austrian Billa, the UK franchisor of Picadilly supermarkets chain, the Turkish Ramstore and the French do-it-yourself supermarkets chain Mr. Bricolage. By the end of 2004,these chains had a large number of stores throughout Bulgaria: Billa (20), Fantastiko (18), Metro (7), Ramstore (3), Bricolage (3). New chains continue to appear like the German supermarket Hit. Technopolis, Technomarket, Euromarket and Elite are retail chains for houseware electronics.

Selling Factors/Techniques

Bulgarian consumers and companies have low purchasing power, which means that price is a major consideration in developing a market strategy. While some customers may prefer to "buy Bulgarian," frequently there is no Bulgarian manufacturer or it is recognised that the Bulgarian supplier does not have the capacity or the quality of product to meet the customers' needs. So frequently the contest is among American, European and Asian suppliers. American companies are widely recognised for their quality and reasonable price, and value sells well in Bulgaria.

Market statistics are essential to choosing specific marketing strategies, but the Bulgarian market can be complex and difficult to gauge. Available market size statistics are usually unreliable and do not assist in accurately predicting market responses. While low official disposable income statistics might initially discourage market entry, the size of the unofficial economy and inferences from observing actual sales activity paints a brighter picture.

Electronic Commerce

Shopping over the Internet is not very popular in Bulgaria and most people still prefer to shop at local stores. However, Bulgaria also has a reputation of quickly following new developments in the information technology sector and with the globalisation of the Bulgarian economy, e-commerce will probably replace a substantial part of the traditional retail trade.

Hampering the speedy development of e-commerce in Bulgaria is the underdeveloped banking system, small base of credit and debit cards and difficulties in prompt deliveries of goods. Despite these difficulties, some companies are already offering goods for sale over the Internet.

A new e-government project in Bulgaria will introduce 20 new services to citizens and corporate structures by the end of 2005. The package of 20 services is the minimum required by the European Union so that the country may get integrated in the Pan-European Global Information System after 2005. At present e-Government in Bulgaria offers 11 services. Around 3,000 companies submit their VAT tax returns via Internet. Some 2,700 individuals have used the online payment system e-Pay to settle their tax debts.

Trade Promotion and Advertising

Advertising is regulated by the 1998 Law on the Protection of Competition and the 1999 Law on Protection of Consumers and on Trading Rules. These laws prohibit advertisements, which disseminate misleading information to consumers or malign the reputation of competitors. Separate legislation regulates advertising for specific products such as tobacco products, pharmaceuticals, and alcoholic beverages. There are about thirty companies that provide a full range of professional advertising services. These companies have formed an advertising association, and there is at least one other association comprised of smaller companies.

Pricing

Due to low per capita income and purchasing power, consumers are highly price sensitive. However, consumers are willing to spend more in return for higher quality. Most people restrict purchasing to basic necessities. Imported products are typically higher priced than locally produced goods.

EU manufacturers considering export to Bulgaria should look closely at ways to cut transportation and distribution costs for selling to Bulgaria so that Bulgarian customers can benefit from the wide variety and attractive prices of American products.

Sales Service/Customer Support

Bulgarian consumers expect good after-sales service and customer support when purchasing products. New private companies understand the importance of customer support and follow through on promises. Companies expect support from the EU exporter when purchasing imported products. Given that prices are generally higher and their limited budgets are already stretched, service and support by their suppliers are mandatory in their view. Emphasis on customer support is an initial step in developing customer loyalty. Most American companies operating in Bulgaria provide training to their distributors/agents. In many cases, agents and distributors are trained in the United States in order to communicate the firm's distinctive corporate policies, behavior and standards.

Protecting Your Intellectual Property

Bulgarian law protects the acquisition and disposition of property rights.

Bulgaria is a member of the World Intellectual Property Organisation (WIPO) and a signatory to the following agreements:

• Paris Convention for the Protection of Intellectual Property;
• Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcast Organisations;
• Geneva Phonograms Convention;
• Madrid Agreement for the Repression of False or Deceptive Indications of Source of Goods;
• Madrid Agreement on the International Classification and Registration of Trademarks;
• Patent Cooperation Treaty;
• Universal Copyright Convention;
• Bern Convention for the Protection of Literary and Artistic Works;
• Lisbon Agreement for the Protection of Appellations of Origin and their International Registration;
• Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purpose of Patent Protection;
• Nairobi Treaty on the Protection of the Olympic Symbol;
• Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks;
• Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks;
• Strasbourg Agreement Concerning the International Patent Classification;
• Locarno Agreement Establishing an International Classification for Industrial Designs;
• WIPO Copyright Treaty; and
• WIPO Performances and Phonograms Treaty.

Due Diligence

There is only one internationally recognised credit reporting agency in Bulgaria, Credit Reform Bulgaria, headquartered in Germany, although there are new companies that have advertised their ability to check corporate references and provide corporate financial data.

An agency called the Financial Intelligence Agency (full member of the international EGMONT Group) has been established with the Ministry of Finance in 2001 by virtue of the Law on Amendments and Complements to the Law on Measures against Money Laundering (LMML). The Agency receives, preserves, examines, analyses and discloses to law enforcement bodies information, connected with suspicion for money laundering or financing of terrorist activities. The Agency also carries out international exchange of financial intelligence information and performs control over the persons under article 3, paragraphs 1 and 2 of the LMML with regard to the compliance to the anti-money laundering measures and measures against financing terrorist activities.

Local Professional Services

www.government.bg (Bulgarian Government English language site)

www.bcci.bg (Bulgarian Chamber of Commerce and Industry)

b2b.bia-bg.com/index.asp (Bulgarian Industrial Association)

www.biba.bg (Bulgarian International Business Association)

www.sofiaecho.com (English language news service for Bulgaria)

Leading Sectors for EU Export and Investment

Commercial Sectors