In an attempt to stimulate Foreign Direct Investment in Bulgaria the Cabinet succeeded in adding to Parliament’s agenda amendments to the Investment Encouragement Act a week before the end of its four-year term. The Cabinet first proposed the amendments in January 2009 and now, four months later,  Parliament has adopted, on first reading, amendments to the system of granting government help to foreign investors.

Investors currently apply for first- (A) and second-class (B) certificates depending on the scale of the investment. Under current legislation, the state backs first-class certificate holders who develop projects worth at least 70 million leva with building adjacent infrastructure. Second-class investment certificates offer fast-track administrative support to investors who invest at least 40 million leva.

On May 18, Parliament decided to lower these thresholds to 32 million leva for first class certificates and 16 million leva for second-class certificates. Municipalities with an unemployment rate that is not below Bulgaria’s average will issue investment certificates to investors who invested 16 million leva (class A) and eight million leva (class B).

As for investments in high-tech sectors, the minimum amount required for granting a class A certificate is 16 million leva and eight million leva for class B. Companies will no longer be required to present their financial reports for the past three years but only for the current and the previous year. Another amendment stipulates that those with more than a 10 per cent share in the companies no longer need to present information about their overall current economic activity.

Easing the procedure for granting the certificates followed statements by Stoyan Stalev, head of the country’s promotion authority InvestBulgaria Agency, who on several occasions in the past six months said that the high threshold was one reason why only a little more than a dozen investors received government help in 2008. On May 25 this year, Bulgarian-language Dnevnik daily quoted Stalev’s words to Bloomberg news agency that this would hardly change in 2009 because of the economic downturn.

He said that FDI in Bulgaria would fall by one third this year or about four billion euro,  given that in 2008 FDI was about six billion euro. His most pessimistic prognosis was for a drop to three billion euro by the year’s end. Such a serious decline will inevitably lead to problems for the economy at a time when a new government is expected to take power after the July 5 elections.

The issue is important because FDI has always been pointed out by this and previous governments as one of Bulgaria’s main achievements. In 2004, the volume of investments, two billion euro, accounted for a quarter of total FDI volumes for the period 1992-2004. Since then, the volume of investments in absolute terms has bested each previous high with double-digit year-on-year growth.

The volume of FDI in 2007 rose by 20 per cent year on year to 5.2-5.3 billion euro, a trend that continued upwards in 2008. What’s more, in 2007 Bulgaria attracted a fifth of total investments in the South East European region.

Now, however, despite encouraging words from Finance Minister Plamen Oresharski that Bulgaria would survive the crisis better than Western economies, Stalev’s words to Bloomberg suggested otherwise. In such a situation the Cabinet’s last minute efforts to ease conditions on granting investors’ certificates could be rather too late because the negative effect on the economy has long started to show, and lowering thresholds is unlikely to change that.  

The amendments also fail to tackle the more serious issue of the structural imbalance of FDI in Bulgaria, an issue reported by The Sofia Echo on several previous occasions and acknowledged by experts. Unfortunately, despite huge investment volume recorded in the past, more than half of it had been invested into speculative capital. Arguably, this has not triggered a healthy growth in the Bulgarian economy because it does not encourages growth in domestic output, productivity or the creation of new jobs.

So, in a way, by not dealing with these problems the amendments proposed by the Cabinet could make it easier for investors looking for quick return on their investments to apply for government help rather attract the so-called strategic investors.