In a move that has been expected for almost a year, Bulgaria looks likely to create the first development bank in its history. The bill to set up the Bulgarian Development Bank (BDB), which will succeed another state-run financial institution – Encouragement Bank – has already passed the first reading in Parliament. The Government has now agreed to the project at the idea level, in April 2007, and to the BDB bill in January 2008.
After the legislation’s final endorsement in Parliament, Bulgaria will be the last but one European Union member state to establish a state-run business strategically geared to spearhead the growth of small and medium enterprises (SMEs) and, thereby, overall economic growth. At present, only Bulgaria and Ireland do not have a development bank.
The project
BDB will be majority-owned by the state with at least 51 per cent in non-transferable shares, according to the bill. It will start with paid-in capital of 38.6 million leva, the capital of Encouragement Bank and will be allowed to perform, on shareholders’ approval, as many capital increases as it deems necessary.
Since the bank is to run on a model similar to development banks elsewhere in Europe, shareholders are to be restricted to the Council of Europe Development Bank, the European Investment Fund and development banks of other EU member states.
The bank is to have two subsidiary structures, the National Guarantee Fund (NGF) and a Capital Investment Fund (CIF), both also at least 51 per cent owned by the state.
NGF is intended to offer SMEs guarantees on loans with local commercial banks, as well as collateral for loans to foreign banks borrowing funds for buyers of Bulgarian SMEs’ exports. According to finance ministry officials, SMEs often miss out on export opportunities because of a lack of guarantees and collateral.
NGF, for its part, is intended to act as a venture capitalist. It will act as a business angel for SMEs with good growth prospects, ideas carrying higher risk and limited assets. The SMEs will also have to operate in sectors of priority to the Bulgarian economy.
The main goal of the bank itself will be to serve as the financial aide for SMEs, public-private partnerships and initiatives aimed at mitigating regional trade differences. The main activities of the bank will include pre-export and export loan financing for SMEs, offering export-related products such as guarantees for participation in tenders, guarantees for advance payments and guarantees for loans to exporters.
Furthermore, BDB will finance – either through using local commercial banks as mediators or directly – SMEs’ activities. The bank will also finance investments of Bulgarian small and medium business abroad. Consultancy on all stages of financing and re-financing will also run as a parallel service. Financing is due to come from its own resources, bond issues and deposits, as well as funds from foreign financial institutions including EU structural funds.
Pros and cons
Despite the underlying positive importance of the project and the fact that the model is familiar, the BDB bill did not receive a warm welcome. In Parliament and through statements circulated in the media, politicians and experts sparred over the expediency of the project. Proponents saw in BDB the standard EU instrument to improve – through long-term loans and investments – the export, innovation and operational potential of SMEs. Opponents argued it created leeway for top-tier corruption. As the clear-cut rules on the selection of BDB beneficiaries were yet to be defined, the opponents cast doubts as to whether some companies would be preferred over others because of their ties with public officials.
Some said because a score of local private banks had already created ample lending opportunities for SMEs, the creation of the bank came too late. Yet another argument against BDB saw little economic sense in building the bank on the basis of Encouragement Bank, an institution with modest presence on the banking market with 0.40 per cent market share and only 70 loans issued a year. In addition, the country already had the agencies to administer EU funds so why did it need another, they asked.
Others disagreed with the arguments behind the bill. BDB lacked the methodology to quantify the effect of its support on overall GDP growth; the main reason behind the set-up of the bank is to stimulate the economy. What is more, the Government will have to provide guarantees for BDB debt; funds will come from taxpayers’ pockets.
Acting as consultant on projects applying for EU funding does not befit a state structure, yet another argument said. Neither does the role of a venture capitalist, which the state planned to do through the CIF.
Government go ahead
Despite the deluge of criticism, Parliament is likely to pass the BDB legislation and the Government has created a number of fringe events to sweeten the bill’s passage. On March 6, the Finance Ministry, the principal of the future bank, hosted a seminar on the role and model of the BDB. Guest lecturers included Francis Carpenter, chief executive of the European Investment Fund, and Alfred Melamed, lead manager at the projects division of Austria Wirtschaftsservice. They said that a development bank was an indispensable tool for the state and for this reason the overwhelming majority of EU countries had such a bank at their disposal. They said that development banks in the EU had 500 billion euro in assets and had all performed well.
As a result of Bulgaria’s plans to set up a development bank, the Network of European Financial Institutions for SMEs (NEFI), whose members include 12 EU development banks, decided to meet in Sofia on March 13. The NEFI debated pressing issues related to stimulating small and medium businesses.
To date, network members have issued loans worth 20 billion euro to 117 000 SMEs. Encouragement Bank has been a full-fledged member of the network since January 2007.
Bulgarian Parliament is due to revisit the bill by the end of March.
