6. Investment promotion and facilitation

As highlighted in the OECD Policy Framework for Investment (OECD, 2015a), investment promotion and facilitation – if adequately designed and implemented – can be powerful means to attract investment and ensure its contribution to economic development. As such, countries worldwide decide to not only remove restrictions on foreign direct investment and provide high standards of protection to investors, but also to proactively promote and facilitate investment, or certain types of investment, to maximise the benefits to the host economy. Considering that Bulgaria has removed most formal barriers to FDI, and is subject to the EU’s regulatory acquis, it can benefit from active and well-designed investment promotion and facilitation policies to help attract and retain investment that can assist its transition towards more innovation, diversification and high-quality employment.

Bulgaria has made progress in improving its overall investment climate, as reflected in the existing business surveys and reports by international organisations. For example, the share of firms reporting political instability and corruption as a key barrier to firms diminished by nearly 10 percentage points in the World Bank’s Enterprise Survey between 2013 and 2019 prior to political crises that Bulgaria faced throughout 2021 and new political crisis in the aftermath of the Government’s lost of confidence vote in June 2022 (Figure 6.1). Still, firms identify certain policy areas as continuously important obstacles (Figure 6.2), such as the competition from the informal sector. According to EBRD BEEPS survey, 60% of firms reported they have to compete against unregistered firms. In addition, importance of other factors has increased – notably, the availability of skilled workforce and business licensing and permits. This is consistent with the findings of the survey by the Bulgaria Industrial Association (BIA), which also pointed to a lack of skilled labour force and bureaucracy as major obstacles to firms in 2019.1

Addressing these various challenges will require a concerted effort on the part of the government, utilising various policy tools at its disposal. This Chapter provides an overview of Bulgaria’s recent efforts to improve business climate. It first outlines the legal and institutional framework for investment promotion and facilitation and describes the main policy tools in the area, such as the use of EU funds, investment incentives, industrial zones and SME-specific support programmes. It then reviews the activities of the national investment promotion agency (IPA), InvestBulgaria, benchmarking it relative to OECD IPAs. Finally, yet importantly, it analyses the progress made by Bulgaria in reducing administrative burdens and concludes with key policy recommendations.

Over the years, Bulgaria has developed several framework documents that provide the overall vision for the country’s medium and long-term socio-economic development and set out key priorities, including in the area of investment policy (Box 6.1). They provide a framework within which the country’s investment promotion and facilitation policy intervenes and set the national goals that FDI attraction should support. They also shape the expectations of the private sector on the type of support that investors may expect and delineate the responsibilities of different institutions.

In particular, the Act on Investment Promotion (AIP) is the main legal document outlining the type of support provided by the government to investors. It specifies the conditions, applicable procedures and requirements for obtaining state support and outlines the responsibilities of different government bodies. It is primarily concerned with regulating investment incentives. This is a relatively common approach to investment promotion acts in transition economies that have recently become EU Member States and have undertaken active steps to comply with the EU state-aid rules.2

Yet, in order to start addressing the remaining obstacles to doing business in Bulgaria and ensure a co-ordinated whole-of-the-government approach, a more comprehensive approach to business climate reforms may be desirable. The government could hence consider whether it would not be beneficial to formulate a detailed action plan on the implementation of different priority business climate reforms with specific measures to be implemented, responsible authorities identified and timelines set. The plan should be more detailed than the 2015 Action Plan for Improving the Investment Environment, specifying concrete steps to be taken to address bottlenecks while being more comprehensive than the AIP. It could build on the existing analysis and projects, including those realised in the framework of co-operation with the EU, or be part of the next phase of national planning to avoid duplication. By including specific projects aimed at addressing remaining barriers, such an exercise could help operationalise the objective of improving the overall business climate. The plan could be made publically available to allow for tracing of progress achieved. If the government is seeking an inspiration in international good practice, it may be interested in the way that Uruguay – which adhered to the OECD Declaration on International Investment in 2021– integrated investment climate reforms in its national planning process.

The newly established Ministry of Innovation and Growth could clearly play a role in the process, being the principal institution responsible for investment policy since early 2022. For the projects involving other ministries or agencies outside of the Innovation and Growth Ministry’s responsibilities, support at the highest levels of government and the involvement of the inter-Ministerial co-ordination mechanisms that pre-existed to the creation of the Ministry of Innovation and Growth (see below) would be beneficial to ensure co-operation.

In Bulgaria, as in other countries, several different institutions are involved in the elaboration and implementation of the investment promotion and facilitation policy (Box 6.2). Prior to the establishment of a new government in December 2021, and pursuant to the Act on Investment Promotion, the Ministry of Economy was in charge of the development of the national investment promotion policy, aided in implementation by InvestBulgaria Agency (IBA), at the national level, and by regional governors and mayors at the sub-national level.

In addition, several bodies aim to facilitate cross-institutional co-ordination. For example, under the previous administration, the Ministry of Economy had created a high-level permanent Taskforce (composed of Deputy Ministers and Secretary Generals) to co-ordinate support measures for investors. The National Economic Council (NEC), created in 20153, has been charged with developing and proposing regulations to encourage investment activity, increase the overall competitiveness, and organise and control the interaction between the executive authorities, other state bodies and business representatives. Meeting regularly, its decisions have been published on the websites of the Ministry of Economy and the Council of Ministers. Finally yet importantly, the National Council for Tripartite Co-operation, which consists of representatives of the Council of Ministers and representative organisations of employees and employers, can also play a relevant role in providing a platform for negotiation of certain reforms (see Chapter 8 on Responsible Business Conduct).4

As highlighted in the OECD Policy Framework for Investment (OECD, 2015a), the ability to co-ordinate effectively the various activities is critical for successful business climate reforms. As such, the government could consider seeking feedback from relevant stakeholders if they deem the current co-ordination mechanisms to be sufficient. The national planning (described above), with specific deliverables and joint projects identified for different institutions could also facilitate co-ordination. While NEC by its nature could be naturally placed to co-ordinate such horizontal efforts, its technical capacity and the Secretariat may need to be strengthened further to ensure tangible progress in implementing reforms.

Bulgaria has a corporate income tax (CIT) rate of 10%, which is significantly below the OECD average (Figure 6.3). It can make the country an attractive location to certain investors. There are also different kinds of investment incentives available to locally established firms, both foreign and domestic, without differentiation by the origin of capital. As an EU Member State, Bulgaria is also subject to the EU State Aid rules.5

The legal framework for regulating investment incentives in Bulgaria is well developed. Fiscal incentives are consolidated in, and regulated by, the respective tax statutes, i.e. Value-Added Tax Act (VAT Act), the Corporate Income Tax Act (CITA), the Social Insurance Code and the Law on Income Tax of Physical Persons. They involve a reduction of and exceptions from CIT payments, accelerated tax depreciation or losses carry-forward; special arrangements for VAT payment; and tax relief concerning pension funds under the Social Insurance Code, among others (see Box 6.3 for an overview). Financial investment incentives are also available to firms in Bulgaria as regulated by the AIP and its implementing regulations.6

Overall, there are four types of certified investment projects in Bulgaria – Class A, Class B, Class C and priority investment projects – that can benefit from government support (see Box 6.4). They differ in terms of the eligibility criteria, which relate to the character of the economic activity, size of investment and job creation effect, among others, and the application process. As of November 2021, applications for Class A and B investment project certificates had to be submitted to InvestBulgaria and Class C to the mayor of the municipality where the project would be implemented. Both Class A and Class B certificates were issued by the Minister of Economy; certificates for investment projects with municipal importance (Class C) were issued by the mayor of the municipality. Priority investment project certificates were issued by a Council of Ministers’ Decision, which approved either a Memorandum of Understanding or an Agreement between the Government of Bulgaria and the investor.7

To be certified as a supported investment project in Bulgaria, investment needs to meet several criteria. First, it must relate to the establishment of a new enterprise, extension of an existing enterprise, diversification of the output into new products, or a material change in the overall production process. For Class A, B and C projects, investment must be implemented in specific economic activities, according to the Statistical Classification of Economic Activities in the European Community (NACE Rev. 2), i.e.: manufacturing (with certain exceptions) or in specific high value-added services sectors (i.e. high technology activities in computer technology, R&D, accounting, tax and audit services, education and health care and storage of goods).8 The project also needs to satisfy the minimum investment and job creation requirements; and needs to comply with other conditions related to the project’s realisation, duration, source of financing, and purchases of inputs, among others.9 Priority investment projects do not need to belong to a particular sector and are those that are considered essential for the economic development of the country or its regions and are required to have at least EUR 51 million of investment or 200 newly created jobs, unless other conditions apply.10

Under the previous administration, the information on certified investment projects in Bulgaria was collected by the Ministry of Economy.11 According to the data provided by Bulgaria’s Ministry of Economy, between 2008 and 2020 a total of 245 certificates were issued under the Investment Promotion Act and the Regulations for its implementation, which resulted in the creation of 38 628 new jobs (Figure 6.4). In addition, according to the data on IBA’s website, most of the supported projects were Class A projects and a handful of priority investment projects during that time. Between 2013-20 the Ministry of Economy of Bulgaria allocated BGN 49.4 million (approximately EUR 25.2 million) from its budget to financial incentives dedicated for investment projects certified under the AIP (Figure 6.6).

Besides investment incentives described above, Bulgaria also offers investors advantages associated with locating in one of its industrial zones. According to IBA’s website, there were in 2021 about a dozen of functional industrial zones in Bulgaria and another dozen with the infrastructure ready and available for investment or being under development. Through the catalogue of industrial zones available on IBA’s website and the website of the National Company Industrial Zones (NCIZ), detailed information on over 30 such zones is available (Table 6.2). The Bulgarian Chamber of Commerce and Industry also provides information on the different industrial zones and parks available in the country.12

There are both private and publically managed industrial zones in Bulgaria. At the time of writing this Review, the NCIZ was a company under the guidance of the Bulgarian Ministry of Economy, whose mandate was to design, develop and manage industrial and free zones. In 2021, the company managed 12 industrial zones, seven of which were in operation (Sofia, Burgas, Vidin, Ruse, Svilengrad, Stara Zagora and Varna) and five under development (Kardzhali, Karlovo, Telish, Suvorovo and Varna). According to the information provided by IBA, NCIZ and the National Institute of Statistics of Bulgaria, these zones jointly accounted for a sizable share of the national territory and about 60% of them were located in regions above the national level of poverty.13

Importantly, industrial zone users in Bulgaria do not benefit from a reduced profit tax rate. Instead, there are free zones used not only for custom purposes but also aiming at providing investors with high-quality infrastructure. Technological parks also need to satisfy the conditions of an industrial zone and additionally host predominantly scientific research and development activity, education, information technologies or advanced manufacturing, among others.14 According to AIP, investment projects aiming to create an industrial zone or a technological park are eligible to become certified investment projects. The draft proposal of Industrial Parks Act that aims to regulate the legislative framework for the creation and management of such parks, was adopted by the Bulgarian Parliament in February 2021 and later promulgated in March 2021.15

Overall, considering the number of industrial zones in Bulgaria, the pace of creation of new ones and the share of territory that they occupy, they appear to be an instrument that has been encouraged by the government. Yet, creating areas of such type of good quality and that deliver broad-based development impacts for the local economy can be a difficult task. For example, according to a UNCTAD survey (2019), over half of the special economic zones globally are deemed underused. Based on data on the territory available in different zones, the utilisation rate of industrial zones in Bulgaria also appears low.16

The government could reflect on the factors needed to increase attractiveness of the existing zones and ensure a good governance framework. While zones in Bulgaria do not offer other benefits than customs duty exceptions and access to infrastructure, thus minimising the amount of tax revenue forgone, the costs associated with creating and maintaining their infrastructure need to be weighed against the benefits of (additional) investment attracted. As a first step, the government could ensure that the information on available facilities and the associated investment and number of jobs is available and monitored in a systematic fashion – for example, via consolidated reports to the responsible ministry, which can be made publically available. In addition, a cost-benefit analysis of zones that benefit from state’s involvement and investors’ surveys could also be helpful in deciding about the zones current value-added and potential reforms needed.

Another aspect influencing Bulgaria’s investment attraction policy is the availability of EU funds. Bulgaria is one of the countries that benefits most from the EU support. Under the funding framework for 2014-20, Bulgaria was allocated EUR 9.9 billion via several programmes under the European Structural and Investment (ESI) funds (Box 6.5). This represented an average of EUR 1 363 per person from the EU budget in 2014-20. This means that an additional source of financing is available for eligible investors operating in Bulgaria. As these funds also support and mobilise additional private financing in certain priority areas, they can increase financial liquidity of firms. In the medium and long run, they can also support building of necessary infrastructure and educating the labour force required by investors to consider Bulgaria an attractive investment destination.

For example, a large share of EU funding goes towards greening of the economy (i.e. increasing resource efficiency, environmental protection and climate change adaptation and risk-prevention) as well as educational and vocational training initiatives, research and innovation and high-quality employment. Programmes related to improving local infrastructure that would increase connectivity, improving competitiveness of SMEs and social inclusion are also important (accounting jointly for nearly 30% of funding). Finally, technical assistance and support to public administration can also support the process of professionalising and improving the capacity of government authorities. The creation of the Technology and Innovation Network (T+IN) or “Sofia Tech Park” – the first science and technology park in Bulgaria – is an example of a project created with EU co-financing, which supports the creation of foundational infrastructure for investment attraction in high-value activities.17 While recent evaluations show that the park grapples with several governance and management challenges (European Commission, 2018b), its creation marks an important step in the process of strengthening the local technological ecosystem.

According to the EU, nearly 5 000 firms have benefitted from support under the ESI funds and nearly twice more are planned to benefit from the support in the future (European Commission, 2020b/d).18 In addition, EUR 0.14 billion in private match grant aid has already been implemented. In terms of the impact on infrastructure, the EU funds are planned to lead to a reconstruction of 665 km of roads and 166 km or rail as well as the creation of 67 km of new roads. It will also involve a creation of new water supply, waste treatment and flood protection facilities, among others. Finally, it will offer training and improved working prospects to participants. The allocation of EU funds is centralised at the Ministry of Regional Development, and, at the time of writing of this Review, there were discussions towards a possible reform.19 Overall, the allocation of EU funds and additional private financing facilitated through this channel can offer new business opportunities both to domestic and foreign-owned firms interested in locating Bulgaria.

SMEs play an important role in the Bulgaria economy. They generate two-thirds of total value added and three-quarters of total employment, above the EU average (European Commission, 2019). Meanwhile, their annual productivity, calculated as value added per person employed, is approximately one-fourth of the EU average. Unsurprisingly, as discussed above, a sizeable share of EU structural and investment funds in Bulgaria is allocated to SME development. The SME Initiative is an example of an EU-co-financed programme designed to facilitate SME financing. Moreover, in reaction to COVID-19, additional funds from the “Innovations and Competitiveness” programme were made available to support SMEs (European Commission, 2020c).

The importance of EU funds and policies in shaping the overall framework for supporting SMEs in Bulgaria is evident in the institutional and policy set-up in this area. The main strategic document in this domain until 2021 was the National Strategy for Promotion of SMEs 2014-20, which was based on the Small Business Act for Europe (SBA). In 2021, a new strategy for 2021-27 was adopted with financial support from the European Commission.

At the end of 2021, the main institutions responsible for supporting SMEs, including their internationalisation and access to finance, were: the Bulgarian Small and Medium-sized Enterprises Promotion Agency (BSMEPA); the responsible body for the Operational Programme “Innovation and Competitiveness” under the Ministry of Economy; the responsible body for the SME Initiative Operational Programme; the Bulgarian Development Bank; and the Fund of Funds, managing four operational programmes co-financed by the EU.

According to the European Commission, in 2019 Bulgaria was lagging behind in several areas related to implementing the SBA (European Commission, 2019a). The main challenges for Bulgaria lie in upskilling its workforce, encouraging SME investment in innovation and fostering growth in entrepreneurship as discussed earlier in this Review. According to the 2018 survey on SMEs conducted by the European Commission and the ECB, almost 30% of SMEs surveyed identified availability of skilled staff or experienced managers as their biggest challenge (EBRD, 2020). Slow progress in simplifying administrative procedures, discussed in the last section of this chapter, has also been pointed out as affecting SMEs adversely. Meanwhile, Bulgaria has made significant progress in improving the access to finance of SMEs, including through the use of different programmes co-funded by the EU. This is consistent with the results of the World Bank Enterprise Survey (2019) that showed that many firms had access to credit lines in Bulgaria and only 11% of local firms considered access to financing as major concern, which is significantly below the regional and world averages (Figure 6.7). In the recent years, the government offered several additional financial instruments available to SMEs (Box 6.6).

The overall progress in reducing administrative burdens on all firms will be reviewed later. Nevertheless, some initiatives aimed specifically at SMEs are worth highlighting here. For example, the Ministry of Economy and Industry developed a “Business Guide for SMEs”, available since 2019, aiming to explain in simple terms the steps that entrepreneurs need to take in commonly encountered situations, ranging from starting a company, hiring staff to resolving insolvency, to comply with 120 most complex and common regulations.20 The information, organised by themes, was made available online, in both Bulgarian and English. In addition, as part of the overall process of improving the quality of new regulations in the country – discussed in the next chapter – the government has made more systematic use of the “SME Test”, i.e. considering ex ante the possible impact of proposed regulations on SMEs.

Overall, further progress in reducing administrative burdens, proposing simplified solutions and e-services can have an important impact on SMEs. Due to important knowledge and skills gaps identified in local SMEs, BSMEPA can play an important role by providing capacity-building support and help local firms reach foreign markets. Its network of regional offices can help it reach firms in different regions.21 Given the potential learning and upgrading opportunities offered by business linkages between domestic and locally established foreign firms, new programmes and collaboration with the IBA (see next section) could be beneficial in this regard. Moreover, considering the importance of difficulties in hiring skilled labour locally, faced by both foreign enterprises and domestic SMEs, BSMEPA and IBA could consider offering specific services in this area.

National investment promotion agency can be an important and relevant actor in the institutional landscape for investment promotion and facilitation. The economic literature shows that IPAs help bridge information asymmetries and attract investment into the local economy (Volpe Martincus et al., 2020; Harding and Javorcik, 2011/ 2012/2013; Alfaro and Charlton, 2007). Yet, agencies differ substantially in their characteristics and the type of and quality of services provided to investors, which in turn can affect their effectiveness in FDI attraction (OECD, 2018; Volpe Martincus and Sztajerowska, 2019). In the case of Bulgaria, the InvestBulgaria Agency, serves this function. As the agency participated in the OECD-IDB survey of IPAs (Box 6.7), its characteristics and activities have been compared to agencies in the OECD countries.

InvestBulgaria Agency (IBA) is an executive agency public agency, reporting to the government. Its overall objective is to provide free-of-charge information, contacts and project management support services to potential investors (Box 6.8). In 2021, with a total budget of approximately EUR 0.47 million and 27 employees, IBA was one of the smallest agencies across the OECD countries (Figure 6.8).22 The agency’s budget has been increasing progressively in 2014-18 with a small downward adjustment in 2019 (Panel A in Figure 6.8). In 2021, all of the agency’s budget came from the state’s budget and was allocated by the Ministry of Economy to which it reported. The minister also appointed the Head of IBA. It had annual targets in terms of assisted projects and provided quarterly and annual reports to the Minister of Economy on the completion of its objectives. Unlike most of the OECD IPAs (OECD, 2018), at the time of writing of this Review, IBA did not have a Board overseeing its activities. Therefore, based on the different components of the OECD-IDB IPA Institutional Independence Index, IBA showed a relatively low degree of independence (Volpe Martincus and Sztajerowska, 2019).23 Since early 2022, the new Ministry of Innovation and Growth has been responsible for managing all key state agencies in charge of promoting strategic investments, including IBA.

In 2021, most IBA’s staff and budget were devoted to investment facilitation and retention (Panel B in Figure 6.9). This is a common pattern in OECD agencies where investment generation and facilitation account for two-thirds of resources of a typical IPA (OECD, 2018). It also reflects IBA’s role in facilitating the process of investors’ applications to become a certified investment project, described earlier. The agency also provided support to other potential investors by linking them with local consulting and legal firms, providing information on applicable regulations or facilitating contact with other authorities, for example. In a typical year, IBA assisted about 300 firms, 20 of which were certified investors.24

At the time of this Review, the agency had several mandates. Besides inward FDI attraction, IBA also assisted domestic investors interested in investment opportunities at home and in foreign markets. As such, it had more official functions than the OECD average (Figure 6.10). Some of them, such as granting of incentives and negotiations of international agreements, were not typically found in OECD IPAs (Figure 6.11). Yet, as explained earlier, IBA’s role regarding the former relates mostly to processing of investors’ applications, while the ultimate decision regarding state support resided in the Ministry of Economy. While most OECD IPAs perform both investment and export promotion functions, in case of Bulgaria, this task was performed in another agency, BSMEPA, as discussed earlier. BSMEPA also reported to the Ministry of Economy, and, according to IBA, the two organisations co-operated well together.25 This type of arrangement is also practiced by OECD IPAs, where some agencies merge these two functions and others prefer keeping them apart (OECD, 2018).

Unlike many OECD similar institutions, at the time of writing this Review, IBA did not have an explicit regional development mandate. It still rendered some services that support provision of information about investment opportunities across Bulgaria’s different regions. For example, it provided a list of all available investment projects and vacant land for investment projects across the country.26 Yet, in the framework of this Review, IBA reported to the OECD Secretariat not to collaborate with regional bodies responsible for investment promotion. It explained that it consulted them or intervened only as necessary, for example to facilitate investor’s landing or when a firm encountered a particular problem. As a result, at the time of writing this Review, no rules and procedures appeared to be in place to facilitate co-operation between IBA and existing subnational bodies, and the agency did not seem to be fully aware of IPAs operating at the sub-national level. Meanwhile, various major cities have their own municipal-level investment promotion bodies, some of which have well-developed websites and offer investors various services. The lack of explicit co-operation may lead to a duplication or discoordination of efforts, reducing their overall impact.27

Considering that the reduction of social and territorial inequalities is one of the government’s priorities, as expressed in the NDP BULGARIA 2030, this area may merit the government’s attention. Most OECD IPAs considers regional agencies as strategic partners and report to have frequent contact with them. As such, the ministry in charge of promoting investments could consider if and how to best systematise co-operation between IBA and bodies responsible for investment promotion at the sub-national level. Possible approaches include the use of common guidelines, joint participation in events, access to common information systems, exchanges of staff and incentives for agencies (OECD, 2018).28 Feedback from regional partners, business and other stakeholders could provide useful inputs in this regard.

In the case of Bulgaria, the process of prioritisation of investors by the IPA appears to be largely determined by EU state aid regulations and the associated national regulations.29 The AIP, described earlier, establishes IBA as the agency assisting eligible firms in the application process for state support. Yet, some strategic documents, such as the past “Innovation Strategy for Smart Specialization of the Republic of Bulgaria 2014-20”, have provided further guidance on potential sectors where Bulgaria may have a competitive advantage. As such, they could provide insight as which activities IBA could usefully target as part of its prioritisation efforts in investment attraction.30 These sectors broadly correspond to those which were listed on IBA’s website at the time of writing this Review, and for which the agency provided detailed information and brochures.31 In order to increase its impact as an IPA, IBA could consider boosting proactive investment generation activities in high-potential sectors.

Proactive prioritisation could also take place by type of investor. The business consultations conducted by IBA when preparing a report on the possible impact of COVID-19 revealed that some firms believed that a successful attraction of one large corporate player could help locate Bulgaria on the radar of foreign investors and facilitate the process of reducing the existing obstacles to doing business. To increase the probability that an investor of such calibre establishes locally, IBA could consider explicitly targeting large or “lead” investors as part of its prioritisation strategy. For example, some OECD IPAs explicitly target companies on “Forbes 2000” list or established brands (OECD, 2018). Considering IBA’s small size, it could usefully be supported in this task by the ministry in charge of investment promotion and other government bodies. For example, planned state visits at the highest level could be used to hold relevant meetings with the private sector in a given destination.

Last but not least, to assist it further in fine-tuning of its prioritisation effort, the agency could improve its monitoring and evaluation system. While the agency did have in 2021 an internal data collection system, it was still rudimentary. Unlike most OECD IPAs, the agency, at the time of writing this Review, did not have a Customer Relationship Management (CRM) system. Designing and implementing a CRM could help improve the agency’s internal data management, facilitate systematisation of investors’ information for proactive targeting and facilitate internal resource management (Sztajerowska, 2019). As development and tailoring of CRM systems takes time and often is a reiterative process, the agency may need to consider future resources required for the upkeep and adjustments of the system and any possible training of staff. The implementation of a high-quality CRM could also help the agency track better the quality and effectiveness of its services. It could also consider undertaking more systematic surveys of firms to gain insights on how to adjust its services and help identify key obstacles to investment attraction and retention.32 Publishing surveys’ results or using them in conversations with the government can be a potent policy advocacy tool (de Crombrugghe, 2019).

Studies suggest that the impact of IPAs is strongest when such agencies bridge information asymmetries, for example by providing high-quality and timely information to firms (Volpe Martincus et al. 2020). This is critical for new investors not familiar with the local conditions and those already operating locally that wish to expand their operations encounter difficulties, or face changed business conditions. As such, OECD IPAs give particular attention to investment facilitation and aftercare services (OECD, 2018).

Overall, IBA reported in the framework of this Review to provide all standard investment facilitation services associated with project definition and obtaining administrative procedures offered by OECD IPAs (Figure 6.12). In case of certified priority investment projects, IBA can also create ad hoc working groups with the relevant government authorities to resolve a particular issue encountered by an investor (upon request). Yet, unlike OECD IPAs, IBA at the time of writing this Review, provided a rather limited array of aftercare services to all established investors. For example, it did not provide any matchmaking, linkage, cluster-development, or capacity-building support to local firms. Nor did it offer any personnel recruitment or training support or educational programmes to local staff. Considering the importance of local skill shortages in Bulgaria, as highlighted by business surveys quoted earlier in this chapter and as fully recognised in Bulgaria’s most recent development strategies, IBA could consider if it could not usefully support initiative of this type. The experience of the IPA of Costa Rica (CINDE) could provide a useful example in this regard (Box 6.9). Projects designed together with BSMEPA could ensure that such programmes are tailored to SME needs.

While being important in normal times, effective investment facilitation has become a critical capacity of an IPA during a crisis such as the COVID-19 pandemic. Unsurprisingly, the majority of OECD IPAs rapidly reoriented their services towards facilitation and policy advocacy support during the COVID-19 outbreak (OECD, 2020a). In 2020, nearly two-thirds of OECD IPAs had a dedicated and regularly updated COVID-19 section in English on their website and many more provided information in other forms. A number of agencies had also readapted their activities to focus on existing clients. For example, they had dedicated most of their staff’s time to informing firms about government programmes and support their ongoing investments and operations. In this context, having a list of locally established firms and well-designed CRM have proven useful to identify and prioritise investors quickly. IPAs also activated their existing business networks, particularly in the health sector, to help the government fight the crisis.33 Both in the immediate aftermath of the crisis and in the medium to long term, many OECD IPAs have also scaled up the use of digital tools for the delivery of services and are rethinking their priority sectors to adapt to the new market reality.34

IBA has undertaken many similar steps in face of COVID-19 pandemic. For example, the agency – that also entered a teleworking mode as many other European IPAs – continued operating and servicing clients through digital means during the pandemic. For example, it made use of social media (e.g. YouTube, Twitter, Instagram) to communicate with clients on the applicable regulations, government support measures and other relevant issues. It also prepared a report on the likely impact of COVID-19 on FDI and projects assisted by IBA and a newsletter.35 IBA also played an active role in policy advocacy during the pandemic. For example, as a result joint efforts with the Ministry of Economy, a regulation issued by the Ministry of Health allowed certified investors to cross borders without the usually applicable quarantine requirements (Regulation No. RD01 274). Finally yet importantly, in 2020, the agency actively considered potential implications of the crisis for competitive niches available to Bulgaria. In particular, IBA aimed to position Bulgaria as an attractive business location, offering low production costs in close proximity of the EU market, to benefit from potential near- and offshoring opportunities that may arise after the pandemic.36

Building on these initiatives, IBA could consider following the examples of OECD IPAs to further adjust its services beyond the COVID-19 crisis. For example, it could follow the example of several OECD IPAs to provide investors with all the relevant information on its website.37 It could also reflect more systematically how its prioritisation strategy may need to change in light of a projected drop in FDI and its uneven sectoral impact (OECD, 2020b; UNCTAD, 2020).

The quality of regulation has a significant influence on the climate for business and investment. Poorly designed or weakly applied regulations can slow business responsiveness, divert resources away from productive investments, hamper entry into markets, reduce job creation and generally discourage entrepreneurship (OECD, 2015a). In this context, the challenge for governments is, on one hand, to balance their need to use administrative procedures as a source of information and a tool for implementing public policies, and on the other, to minimise the interferences implied by these requirements in terms of the resources required to comply with them (OECD, 2009). There are various tools at the disposal of the governments achieve this objective. These include periodic reviews of the stock of regulations, simplifying administrative procedures and introducing e-government services on top of developing better rules on creating new regulations and oversight of regulatory processes, discussed in more detail in the next chapter on public governance.

While the country has made progress in reducing the administrative burden, as captured by the change in its ranking on the World Economic Forum’s Global Competiveness Index over the past ten years (Figure 6.13), the ease of obtaining licenses and permits, as perceived by businesses, apparently remains a challenge to doing business in Bulgaria. Bulgaria scored 61 out of 190 economies on the World Bank’s Doing Business 2020 and 49 out of 141 economies on the World Economic Forum’s Global Competiveness Index. While these types of rankings should not be taken at face value, they may point to general tendencies and areas that require government’s attention.

For example, the distribution of scores for different aspects covered by the Doing Business indicators shows that Bulgaria performs relatively better in trading across borders (21) and protection of minority stakeholders (25), and relatively worse in regards to getting electricity (151), starting a business (113) and paying taxes (97) (Figure 6.14). The average times obtained via interviews of firms through the World Bank’s Enterprise Survey 2019 also point in a similar direction, in particular in regards to the time it takes to obtain a construction permit, electricity connection or an operating license.38 Surveyed firms also report that over one tenth of senior management’s time is, on average, spent dealing with the requirements of government regulation and 10% of firms select business licensing and permits as their biggest obstacle (Figure 6.15), i.e. a share higher than those in other countries. As there are large differences across the regions, in some places these shares are higher.39

According to the government, the actual time required to complete administrative procedures and obtain permits is shorter than suggested by Doing Business.40 Yet, its internal analysis identified similar priority areas.41 As highlighted earlier, while in absolute terms other issues are considered more important barriers to doing business in Bulgaria by firms – notably, the lack of adequately educated workforce and competition from the informal sector; in relative terms, reducing administrative burdens has increased in importance (Figure 6.1). In addition, as the country has transposed significant amount of common EU regulations and will be subject to new ones in the future, this has also increased the importance of effectively reviewing and streamlining the growing stock of regulations. The EC, while recognising progress made by Bulgaria in this area, has repeatedly highlighted the need for further reforms (e.g. European Commission, 2018-20).

Responding to these concerns, the government has implemented three consecutive plans for the reduction of administrative burdens between 2009 and 2018. The first and second plan involved a target to reduce the administrative burdens placed on businesses by 20% each, and the third by 30%. According to the government, the targets have been reached.42 The Council of Ministers also sought feedback from the private sector on the impact of these changes on business. Yet, the authorities have highlighted that quantifying and reaching targets have been resource-intensive and feedback obtained from firms has suggested that these actions may not have led to improved perception by business (Renda, 2019).

The government has maintained its efforts in this area to achieve tangible progress. For example, in 2017 and 2018, new measures were adopted to ease administrative burdens on SMEs. The Decision 338/2017 of the Council of Ministers (“Reduction of Administrative Burden”) withdrew the requirement for presenting notarised documents to the public administration. By Decision of 5 October 2018, the Council of Ministers also approved a new package of 1 528 measures aimed at changing and improving administrative services for citizens and businesses.43 In addition, as part of the regulatory impact assessment (RIA), introduced in Bulgaria in 2016 – and discussed in more detail in the following chapter – an “SME Test” has been implemented, which aims to explicitly consider the possible impact of regulations on smaller firms, mentioned earlier.

The government has made strides in digitising administrative procedures and offering e-government services online, including to businesses (see Box 6.10).44 For example, the “Strategy for the development of electronic government in Bulgaria 2014-20” aimed to define broad strategic objectives for the delivery of improved e-services; while the roadmap for its implementation listed specific measures for the realisation of strategic orientations. In addition, the State e-Government Agency (SEGA), established in 2016 pursuant to the Electronic Governance Act,45 has been providing relevant government services via a centralised platform. The number of e-government users has increased since 2018. Yet, many of the e-services provided remain limited to the delivery of information. Further reforms may be considered to facilitate widespread use of e-services and improve the necessary IT infrastructure. One constraint to the e-government expansion has been the challenge to retain IT specialists (European Commission, 2019).

It is worth noting that recognising that complying with administrative requirements may take time. One type of service that allows delivery of different licenses and permits in a streamlined and faster fashion for a large number of firms is an establishment of a one-stop solution (OSS) or a single window for investment. While the specific functionality of OSS will determine which aspect of the investment decision it can simplify, effective instruments of such type provide investors with an ability to issue a whole array of permits beyond the sheer business registration (see e.g. World Bank, 2009). Still, progress in speeding up business registration itself is a welcome step.

Despite recent developments such as the 2019 introduction of a free of charge electronic service under the VAT Act, allowing to submit simultaneously an application for registration with the Commercial Register and a request for VAT registration, it currently takes two times longer to start a business in Bulgaria than in the comparator region and over three times longer than in OECD countries (Table 6.4). While some of the steps in the registration process can already be undertaken online, such as the registration with the Commercial Register at the Registry Agency and registering employment agreements with the National Revenue Agency, potentially in the future all steps could be integrated into one platform.

Going forward, the government could consider if it could not build on international good practices to establish an OSS for investors. An OSS solution for investment can be a physical facility where investors can complete all the required procedures or an online service (Table 6.5). While comparative cross-country data on this issue comes from 2009, already then more than a half of countries worldwide had an OSS solution for investment in place (World Bank, 2009). In addition, such countries tended to have over 30% less procedures and over 50% less time spent dealing with them, according to the World Bank’s Doing Business than countries without OSS solutions. Regardless of a particular form that such solution could take, the most important component is ensuring that it can successfully integrate the processes of issuing different permits to effectively cut the steps in the process, instead of adding an additional layer. Potentially, a capacity-building project with support of the EU or other international organisation could assist Bulgaria in this task.

Bulgaria has achieved noticeable progress in improving its investment climate and increasing overall political stability. The proximity of the EU market and availability of EU funds, which have improved financing conditions for firms and can help transform the country’s infrastructure and train local workforce, can also be advantageous for investors. The country also has a relatively low rate of corporate taxation and provides a well-developed framework for provision of state support that can be attractive for some projects.

Still, several obstacles hinder the country’s investment attraction potential. While Bulgaria has made strides in improving the overall planning and co-ordination of its investment policy, a detailed plan with clearly identified priority reforms and allocated responsibilities of different government bodies and applicable timelines appears to be lacking. The institutions aiming to co-ordinate cross-cutting initiatives and reforms to improve the overall competiveness and business climate are also relatively new and may require further strengthening. In some areas, the rules outlining procedures for co-operation are sometimes lacking, as in the case of IBA’s co-operation with subnational bodies. A publically available list of specific initiatives involving different institutions aiming to address key obstacles could help in achieving progress in difficult horizontal reforms – including reduction of administrative burdens – and ensure that the public is aware of the efforts made.

In regards to the investment promotion agency’s activities, IBA is primarily responsible for managing applications of investors wishing to be certified as a supported investment project under AIP. It is a relatively small agency with low levels of institutional independence. For example, at the time of this Review, it did not have a Board of Directors to oversee its functions, unlike is the case in most OECD IPAs. In the area of investment facilitation, IBA performs most standard services performed by other agencies in OECD countries with a notable exception of aftercare services. For example, it does not offer any linkage or matchmaking programmes between foreign and domestic firms nor personnel recruitment support. Given the skilled labour shortages in the country and potential spillovers from SME-MNE links, IBA could consider designing and implementing initiatives in this area in collaboration with relevant government bodies. Strengthening its prioritisation and monitoring and evaluation capacities could also be beneficial as could greater co-operation with sub-national level bodies.

Besides potentially strengthening aftercare capacities of its IPA, the government could usefully focus on achieving further progress in reducing administrative burdens as foreseen. Considering that the experience with setting and reaching quantitative targets for burden reduction has been mixed, existing diagnostics and feedback from business could be used to identify high-impact reforms. Given the time it takes to establish a business and obtain electrical connection, these could be natural areas of focus. In this context, the government could consider if an OSS solution for investment could be feasible and useful, especially building on the progress made in introducing e-services. Considering the importance of competition from the informal sector, facilitating business registration could potentially contribute to formalisation, in particular if coupled with additional incentives, and be particularly beneficial to SMEs.

  • Establish a list of priority investment climate reforms and specific projects to assist their implementation with clearly identified timelines and responsible institutions. The plan should build on the existing strategic planning documents and diagnostics. It could be made publically available and periodically updated. The NEC and the ministry responsible for investment promotion could play a lead role in this regard, supported by high-level of government.

  • Strengthen regional component in investment promotion and develop terms of reference for co-operation across agencies at the central and sub-national level. Differentiate investment promotion according to regional comparative advantages. Use the EU Smart Specialisation framework to aid in this exercise. Rules for engagement with sub-national investment promotion bodies appear limited to processing of certified investment projects. For example, InvestBulgaria Agency (IBA) does not have a regional development mandate and lacks terms of reference for engaging with sub-national bodies. The development and implementation of such rules could help ensure complementarity of efforts and attraction of FDI into different regions.

  • Consider strengthening the aftercare services and technical capacity of IBA. While IBA performs all standard investment facilitation functions in the pre-establishment stage, it does not offer many aftercare services to firms (outside of certified investors). In particular, considering importance of skilled labour shortages in Bulgaria and potential spillover from SME-MNE links, the agency could consider developing such programmes. Specific projects, supported by international donors, could also help strengthen IBA’s monitoring and evaluation and prioritisation capacity.

  • Continue reducing administrative burdens. Administrative burden may be necessary for fair taxation, health, safety, environmental stewardship and other governmental commitments in line with the OECD Guidelines on Multinational Enterprises to improve social progress and the overall quality of citizens’ life (see Chapter 8). Still, from the perspective of business, administrative burdens can be a cost, delay and source of uncertainty with respect to operations and projects. Given the time it takes to establish a business in Bulgaria, these could be natural areas of focus in the short run. In the medium term, the government could consider whether establishing an one-stop solution for investment would help businesses deal with government regulations. In the long run, progress in improving the quality of regulations (discussed in the next chapter) will also help reduce the stock of burdensome requirements.

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Notes

← 1. For more information on the BIA’s survey (in Bulgarian), see: www.en.bia-bg.com/news/view/26324.

← 2. For example, the OECD Investment Policy Review of Croatia (2019) shows that the policy framework there is largely confined to the provision of incentives and allocation of EU funds, governed by the Acts on Investment Promotion and Strategic Investment Projects.

← 3. In 2021, it consisted of 11 deputy ministers from different ministries and the chairpersons of the five nationally recognised employers’ organizations.

← 4. For example, in the past, the Council negotiated and proposed amendments to labour legislation (see Marshall, 2019).

← 5. In Bulgaria, the State Aid Act is fully in accordance with EU legislation since 2007. As a consequence of EU State aid modernisation, a new State Aid Act, from October 2017, regulates the terms and procedures related to the allocation, monitoring and evaluation, reporting and penalties related to violations of state aid; All the relevant laws and regulations linked to state aid granting need to be in compliance with the EU state aid rules.

← 6. The text of AIP (in English) is available on IBA’s website: www.investbg.government.bg/files/useruploads/files/investment_promotion_act_(title_amended,_sg_no._37_2004).pdf as is the text of the implementing regulations: www.investbg.government.bg/files/useruploads/files/regulations_for_application_of_the_investment_promotion_act2020.pdf.

← 7. The details are available on the website of the Ministry of Economy of Bulgaria: www.mi.government.bg/en/themes/application-of-the-investment-promotion-act-95-284.html#:~: text=The%20main%20purpose%20of%20the,Rules%20for%20Implementation%20of%20IPA and on the website of IBA: www.investbg.government.bg/en/pages/11-investment-incentives-184.html.

← 8. The sectoral classification is available on IBA’s website, and at least 80% of the future aggregate income must arise from these activities. All the information pertaining to the eligibility requirements and certification procedures for supported investment project are available (in English) on IBA’s website: www.investbg.government.bg/en/pages/getting-certified-under-investment-promotion-act-166.html.

← 9. The period of project implementation, i.e. the period between the commencement and completion of the project, must not exceed three years. The investment amount per project must not fall below the minimum amounts specified in the Regulation on the Implementation of AIP. At least 40% of the eligible costs for the investment must be financed by the investor’s own or borrowed resources (any resources allocated as state aid or involving an element of state aid, including retained corporation tax, are not considered own or borrowed resources). The jobs created in relation to the investment must be maintained in the relevant region for at least five years in the case of large enterprises and three years in the case of SMEs. The investment must be maintained in the relevant region for at least five years in the case of large enterprises and three years in the case of SMEs, calculated from the date of completion of the investment project. Any long-term tangible and intangible assets acquired shall be new and purchased under market conditions from third parties independent from the investor.

← 10. The minimum investment value is EUR 25 million if investment takes place in municipalities with high rates of unemployment or in general manufacturing activities; EUR 15 million if it concerns high technology activities of the manufacturing or service sectors or EUR 7.6 million if it concerns a creation of an industrial zone or a technological park.

← 11. Information on the certified projects is available on IBA’s website: www.investbg.government.bg/en/pages/certified-investment-projects-in-bulgaria-217.html

← 12. The information is available at www.bcci.bg/zones.

← 13. Information gathered from the websites of IBA (www.investbg.government.bg/en), the NCZI (www.nciz.bg/en), and the National Institute of Statistics (www.nsi.bg/en)

← 14. The definition of an industrial zone as well as a technological park is available in supplementary provisions of AIP. “Industrial zone” shall be a set of one or several adjoining lots with similar characteristics and prevailing assigned use for manufacturing activities, projected by an effective detailed plan, according to the Spatial Development Act. “Technology park” shall be a park which satisfies the requirements for an industrial zone but with a prevailing scientific research and development activity and/or education, and/or information technologies and for innovative activities for technological renovation of manufacturing products and technologies. Complementary investment activities in the manufacturing industry or in another production sector are admissible (Paragraphs 12-13).

← 15. See https://dv.parliament.bg/DVWeb/showMaterialDV.jsp?idMat=156334.

← 16. Information based on the share of available territory to the total territory of the zones for the functioning industrial zones for which such information is publically available.

← 17. The project is co-funded by the European Regional Development Fund through the Operational Programme “Development of the Competitiveness of the Bulgarian Economy”. The grant for the project is of the value of about EUR 47.4 million, split in two phases over 2007-14 and 2014-20 period. The owner of the “Science-technology park” project is Sofia Tech Park Joint Stock Company (JSC). The managing authority is the Ministry of Economy – European Funds for Competitiveness Directorate-General. For more information, see EC (2018).

← 18. All information in the paragraph is source from European Commission (2020b) and the website with the data on the use of EU funds: www.shorturl.at/imHOW

← 19. In 2021, there were ongoing discussions whether to provide a more decisive role to the regions in funds allocation and potentially involving a wider range of stakeholders. The OECD and World Bank were providing support in this process.

← 20. The Guide can be found on the website of the Ministry of Economy: www.mi.government.bg/en/pages/msp-info-220.html. The news release also provides further information: www.mi.government.bg/en/news/a-guide-for-smes-has-been-published-on-the-website-of-the-ministry-of-economy-3716.html

← 21. BSMEPA has a regional network of representatives distributed in six major cities in Bulgaria: Plovdiv, Stara Zagora, Burgas, Varna, Vratsa and Ruse. Their main goal is to build and maintain an up-to-date register of SMEs and provide capacity-building support.

← 22. IBA scores below the OECD average and median and is comparable in size to agencies of other small European economies.

← 23. The Index covers the legal status of an IPA, the share of non-public sources in the IPA’s budget; the share of non-public members on the IPA’s board; the reporting line of the IPA; the approving body of the agency’s strategy; the appointing authority of the IPA’s head; and the ability to pay wages that are higher than those of the public sector, among others

← 24. Information based on data provided by IBA as part of this Review.

← 25. For example, according to the government, they usually perform joint presentations and share with each other information on relevant forthcoming events.

← 26. The former information is available here: www.investbg.government.bg/en/projects.htm; and the latter is available here: www.investbg.government.bg/en/pages/areas-354.html.

← 27. As a case in point may serve the differences in articulation of investment prioritisation strategies: sectors targeted by individual subnational IPAs differ from those listed by IBA on its website.

← 28. For example, in Sweden, a code of conduct agreement among the national IPA and the 15 regions was established to better communicate on opportunities and encourage exchange of information. The agency also used software that allows sharing information with external partners. Business France has designed a formal information-sharing process to increase the efficiency of the collaboration with France’s 13 regions: it created a “marketplace” of investment projects and shares information weekly with its regional partners.

← 29. For example, IBA explicitly states that the Investment Promotion Act is in line with the EU Regulation No 651/2014 on categories of aid compatible with the internal market rules.

← 30. The strategy was approved the Council of Minister’s Decision No 857/03.11.2015.

← 31. Project “Promoting the advantages of investing in Bulgaria” BG 161PO003-4.1.01-0001-C0001, of which IBA was beneficiary was implemented with the financial support of the EU through the European Fund for Regional Development and the national budget of Bulgaria.

← 32. See Sztajerowska, M. (2019) for more information on monitoring and evaluation by OECD IPAs.

← 33. For example, Invest in Canada and Invest in Denmark made their business contacts available to the authorities to support immediate medical and source health care supplies.

← 34. For more information on the impact of COVID-19 on OECD IPAs, see OECD (2020a).

← 35. The newsletter is available on the agency’s website: www.investbg.government.bg/files/useruploads/files/newsletter-march_2020.pdf

← 36. Information provided by IBA to the OECD Secretariat as part of this Review.

← 37. It could consult the website of GTAI of Germany as an example of a well-developed website with all relevant information or the website of Invest in Estonia for the use of artificial-intelligence (AI)-based chat-box. GTAI’s COVID-19 website is available here: www.gtai.de/gtai-en/invest/business-location-germany/corona-crisis-and-germany-232102 and the chat-box on the homepage of Invest in Estonia’s website: www.investinestonia.com.

← 38. For example, firms report to require 46.7 days to obtain a construction permit, 24.8 days for an electrical connection, and 20 days for an operating license. The survey has been conducted on 772 firms were interviewed between January 2019 and April 2020. For more information, see: www.enterprisesurveys.org/content/dam/enterprisesurveys/documents/country/Bulgaria-2019.pdf.

← 39. The share of firms reporting licensing and permits as the biggest obstacle in Bulgaria ranges from 0% in Severoiztochen to 15.2% in Severozapaden according to the World Bank’s Enterprise Survey (2019).

← 40. Information obtained by the OECD Secretariat during the find-finding missions in Bulgaria in 2020.

← 41. In 2015, the Ministry of Economy conducted an analysis of the investment bottlenecks related to business regulation and administrative burden for investors in the country. Based on the analysis ten key problematic areas were identified: access to technical infrastructure grids (electricity, gas, water), constructions permits, administrative services, frequently changing legislation, judiciary system independence and corruption, paying taxes, skills mismatch on the labour market, lack (or poor quality) of the transport infrastructure. Special inter-institutional working groups were established and proposed measures to address these barriers.

← 42. The first target was achieved in 2012, the second in 2014 and 26% of the 30% target in 2018.

← 43. According to the information provided by the government in the course of this Review, the changes are based on information from visits of 3 700 points providing services from all central administrations and their territorial units, including all district, municipal and regional administrations.

← 44. For more information: www.e-gov.bg/wps/portal/agency-en/strategy-policy

← 45. The Electronic Government Act and other strategic documents pertaining to e-government efforts in Bulgaria are available on SEGA’s website: www.e-gov.bg/wps/portal/agency-en/strategy-policy/startegical-documents/startegical-documents

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