Why do foreign investors leave Bulgaria as if it were the Titanic?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Blaga Thavard [Personal archive]

Despite being one of the most beautiful countries in the European Union, having talented and educated people and a favourable tax environment, Bulgaria is likely to stay as the EU’s poorest country, and continue to lose its population, writes Blaga Thavard.

Blaga Thavard is attorney at law, Sofia Bar, lawyer at Pappas & Associates, Brussels.

Foreign investment is a paramount indicator of the economic health of a country. Indeed, international investors enjoy an important freedom of choice, and are the first to leave a country not going in a healthy economic direction. Between 2008 and 2018, foreign direct investment in Bulgaria collapsed, dropping from 28% to 2% of GDP, from $9 billion to just $1.13 billion.

One of the reasons this is happening is that the oligarchic system which includes the key government officials hates foreign investors – they are seen as troublemakers, because they complain to their capitals, and to the European Commission. It’s easier with Bulgarian companies – they accept suffering in silence.

The only reason for an investment is the return on this investment. Therefore, there are two type of investment – there is the risky investment which yield high returns but can lead to loses, and there is the safe investment which only yields a low profit but carries very little risk.

Bulgaria is making an astounding demonstration of strength by proposing an environment yielding low profits with high risks. This has led to dramatic fall in foreign direct investment in recent years.

It is a paradox, given that following its 2007 EU accession, Bulgaria was seen by investors as having a favourable foreign investment regime that included government incentives for new investment and low or flat corporate and income taxes. Bulgaria also still offers some of the least expensive qualified labour in Europe.

One of the reasons for the fall in investment could be the bad image of the country’s judicial system, illustrated among others in the insolvency case of two subsidiaries of the French Belvedere Group and the suspension of their boards.

In 2014, two of the subsidiaries of this French-owned company got involved in legal proceedings following a payment dispute with a local company. Due to the non-payment of two invoices, the local company lodged a request for insolvency.

Then, despite the subsidiaries showing evidence of solvency and the will to solve the issue amicably, the judge in charge of the case froze bank accounts of the companies and replaced their managing bodies with an administrator appointed directly by the judge himself. These measures were deemed to have been illegal by the second-degree court and were later annulled.

This process of judicial ‘company grabbing’ has become known to the international business community. In the case at hand, thanks to the activism of the French Ambassador, the administrator lost his license, and the judge was removed from the judicial body.

Was it corruption or incompetence? Either way, it was not conducive to a good image of the Bulgarian legal system. As it has been revealed by WikiLeaks, a former US ambassador mentioned the case in one of his reports. But even worse than the bad image given to the Bulgarian legal environment, is the weak political response.

Despite the government seeing that a low-level judge could remove the governing body of a company without any fast and immediate recourse being open to a defendant, and therefore opening the possibility of ‘company grabbing’, its only answer has been to order a few reports, without any reinforcement of the guarantees and legal rights given to company owners and investors.

The poor design of the insolvency procedure also opens the question of the quality of the legislation in general in Bulgaria, which on many occasions has been shown to be in contradiction with EU principles. This has been mostly visible in the difficulty of Bulgaria to align its laws to European legislation.

Bulgaria has been accumulating proceedings opened by the European Commission for failing to fulfil its obligations according to the European Treaties, mostly by failing to implement Directives correctly in its national legal corpus.

While every EU Member is subject to such procedures, the difficulty the country has in transposing legislation correctly is concerning, as it means that the legislation will change regularly, leading to legal uncertainty. The lack of a stable legislative framework is a problem for investors.

The third issue affecting foreign investment in Bulgaria is the corruption plaguing the country.

Bulgaria is currently ranked as the most corrupt EU member state according to perceptions, by Transparency International. The report is based on the polling of experts from around the world on topics such as press freedom, integrity, and independent judiciaries.

In 2015, the European Commission found that Bulgaria had done almost nothing to stem the tide of corruption and organized crime. A poll of Bulgarians indicated that 76% believe that political parties are corrupt, and 86% believe that the judiciary is corrupt.

Unfortunately, the Juncker Commission has kept its eyes closed to Bulgaria’s problems.

The situation in Bulgaria is particularly challenging because of the scale of the problem and of the government refusing to acknowledge any problem. Bulgarian authorities have a habit of covering up abuses, disregarding recommendations for improvement, and doing their best to avoid investigation.

One of the most striking corruption scandals – the so-called Yaneva Gate from 2015 – has seen recordings of conversations between high-level judges being leaked on the website of the Bulgarian partner of an organized crime and corruption reporting project. The records reveal conversations on how to decide cases and in whose interest. But these revelations did not lead to any inquiry as it was deemed that the recordings were made illegally.

This case is revealing of the trend in Bulgaria. There are plenty of revelations, and lot of charges for corruption are brought by the prosecution, but the conviction rate is close to zero. This is not merely an issue citizens are facing.

The high level of corruption effectively means that no real economic competition can take place, as companies close to the decision-makers will have advantages against any newcomers, even if they are leading international companies. In addition, it leaves the bloated Bulgarian administration even slower, harder to navigate and unpredictable. Many foreign investors learned the lesson and left.

This is how Bulgaria has managed to achieve an extraordinary feat. Despite its natural beauty,  despite having talented and educated people, and despite a favourable tax climate, it is likely to stay as the poorest in the EU, and to continue losing its population.

This opinion article was first published by EUelectionsBulgaria.com 

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