The Sofia Echo/Sofia Echo Media
November 30, 2007

Defragmenting the economy
Elena Koinova

The 10th economic summit of the Central European Initiative (CEI) member states, which took place November 20-21 in Sofia, was a congregation of events, public officials, business executives and journalists. More than 1600 participants and 160 journalists attended the region’s oldest and largest forum. With its 18 member states, the CEI covers an area of 2.4 million sq km, half that of the European Union, and is home to 250 million people.
Just as vast was the spectrum of topics at the summit’s 18 panels. Government officials, representatives from international financial institutions and the private sector discussed:
•the macroeconomic specifics of Bulgaria and neighbouring countries;
•the situation, challenges and opportunities for the economy as a whole and for individual sectors, alongside projects current and future;
•the existing and emerging sources of financing from the Government, the European Union and international financial institutions;
•the instruments available to raise the economy’s efficiency and efficacy such as public private partnerships (PPP), loans, governmental strategies and operational programmes;
•small and medium enterprises and prospects for development.
Macroeconomic snapshot
Over 18 years of transition, Bulgaria had achieved tangible progress in transforming into a market economy yet there is still much to be done. A number of CEI panellists came to this conclusion, through general statements and talks on progress achieved, across all panels of the summit.
The frequently cited successes were a fast-growing GDP, fast-paced reforms, sustained fiscal discipline, declining unemployment and foreign direct investments (FDI) influx at 16.4 per cent of GDP.
However, there were still many challenges, on both a macro- and microeconomic level, international financial institutions and a number of public officials said. They included delayed reforms of the public sector, soaring current account deficit, poor infrastructure and a shortage of a qualified labour force among others.
The World Bank (WB) and the European Bank for Reconstruction and Development (EBRD) added an educated evaluation of Bulgarian economy’s performance through surveys and analyses on just Bulgaria, Bulgaria as a country in transition, as an EU member state or a country within a global report.
This analysis brought an original angle to the economic talks.
Bulgaria was still an economy of the closed type and testimony to this end was the small volume of goods and the low quality of imports, WB resident representative in Bulgaria, Florian Fichtl, said.
The conclusion, featuring in a six-year analysis, was highlighted by the fact that Bulgaria performed poorly in a report on how favourable the business climate in a country was, Bulgaria ranked 46th.
However, the WB saw some positives for Bulgaria including its fiscal stability and the reformed banking sector.
To ensure that Bulgaria stayed on course toward an advanced market economy, the WB official called for tax reforms, improvements to infrastructure, investment into productivity-raising and human resource development projects.
The WB also urged Bulgaria to make salary growth equal to growth in productivity to spearhead a catch-up with the rest of the EU in terms of efficiency.
Fabrizio Coricelli, the head of the EBRD policy studies department, concurred with the WB conclusions.
Bulgaria fared well in a world scoreboard on progress in reforms with a score of 3.5. The performance was comparable to the 3.5-4 average score of most other EU member states, Coricelli said. The country had made significant headway in the fields of competitiveness and banking reforms, yet Coricelli warned that reforms were set to decelerate as Bulgaria was heading toward the most difficult set of reforms.
The third phase involves reforms in the public sector and improvement of governance. Education and health care, in particular, should be the focus to ensure no local civil unrest in the future, the expert said.
Taking the macroeconomic picture into account, the panels focused on sectors of key importance to Bulgaria. The sectors included energy and energy efficiency, infrastructure, small and medium enterprises, the information technology and communications sector, transportation and business registration.
Energy
It was noted that the Balkans was the sixth most important region in Europe and Bulgaria its key player. Bulgaria’s ambitions to remain a major power hub – in electricity production and distribution, gas distribution and transit and crude distribution and transit – was the main focus of the energy-dedicated panels. The main message was that the country needed to focus on building new capacities and on developing inter-grid connections to retain its key role in the region.
As for electricity, Bulgaria’s Economy and Energy Minister Petar Dimitrov said Bulgaria used to supply up to 80 per cent of the electricity deficit in the Balkans and now, after the closure of units three and four of the Kozloduy nuclear power plant, the country could only cover up to 20 per cent of the shortage. This had resulted in a five terawatt hour shortage in the region, a concern for countries in the region.
The closure of the two nuclear reactors had changed the percentage of electricity generated from nuclear, thermal and hydro-power plants from 43.6:45.3:11.1, respectively, to 34:59:7, at present. The change in that generated from hydro-electric plants being driven mainly by unfavourable weather conditions
Representatives from Bulgaria’s power grid operator NEC forecast that the mix would change to 38-47-15 by 2015 after the construction of the Belene nuclear power plant, additional new coal-powered capacity and small hydro-power plants.
The gas segment, in turn, had huge prospects for development now that investors in three gas pipeline projects had opted to lay pipes through Bulgaria. The Nabucco, South Stream and AMBO gas pipeline projects were set to make Bulgaria a key transit point in the region. Bulgaria was also working on the construction of a liquefied gas terminal on the Black Sea coast, economy and energy ministry officials told the CEI summit. Bulgargaz CEO Angel Semerdjiev said Bulgaria now had 1700km of gas mains and a 945km long transit system.
Touching on energy efficiency, Bulgaria received the praise of Jacquelin Ligot, head of the EBRD’s Energy Efficiency Team. Unlike other countries in the region, Bulgaria had established clear-cut rules and policies on the implementation of energy efficiency measures in both the household and industrial sectors.
According to Kostadinka Todorova, an energy efficiency expert at Bulgaria’s Economy and Energy Ministry, once these measures were implemented, Bulgaria’s small and medium enterprises efficiency would rise radically because of the lower costs and lack of restrictions for failure to commit to the high environmental and energy standards of the EU.
Paul Wade of the International Energy Agency said Bulgaria should also work on enhancing energy efficiency of its residential housing fund. He believed that the successful implementation of a policy for the conversion of buildings into so-called passive buildings would help Bulgaria achieve 75 per cent in energy savings.
Small and medium enterprises
The top challenge for small and medium enterprises (SME) in future will be to remain competitive within a globally growing market. Only a quarter of all SMEs in the 27 EU member states had the capacity to expand to foreign markets.
The most common challenges SMEs faced was the lack of employees with international business knowledge, a non-efficient internationally-oriented business approach, the lack of knowledge of international markets, the inability to discern international business opportunities and a lack of capital to finance export-oriented activities. There were also challenges stemming from trade barriers and the lack of trade development policies.
Among the instruments aimed at promoting SMEs in the future was the EU’s Competitiveness and Innovation Programme for the 2007-2013 period and the INTERREF IV programme.
The Bulgarian Government, for its part, should give its input to the internationalisation of SMEs through drafting the relevant policies.
At the panel dedicated to projects aimed at the development of SMEs, participants pinpointed a number of EU programmes aimed at creating the backbone of economic development in the country.
In the period 2007-2013, SMEs in the 27 EU member states are entitled to six billion euro in funds under the seventh framework programme stimulating innovation and research and development projects. SMEs can apply for funds under several categories including information and communications technologies, energy, transportation and security procurement projects.
Claudio di Giorgio, the head of the information services and innovation department at Informest highlighted the need for more information about financing opportunities and the existence of Idea.Network, an interactive database aimed at stimulating services in support of business in the countries of Central and Eastern Europe.
Idea.Network had 234 business-stimulating organisations as members as well as 678 project entries, with participants from CEI countries.
Road Infrastructure
Road infrastructure in Bulgaria was in a very poor condition, Bulgaria’s Regional Development and Public Works Minister Assen Gagauzov said at the Support of Business through Development of Road Infrastructure panel.
The minister admitted that the bulk of local roads had last seen repair works 20 years ago, the main reason behind this was a lack of financing. Given this, providing funds for the rebuilding and resurfacing of roads was the top priority both at national and local government level.
With its entry to the EU, Bulgaria now had access to regional development and cohesion funds, Gagauzov said. The ministry had been quick to develop the Regional Development operational programme for the period 2007-2013, which was drafted to absorb money from these funds. The programme will receive 300 million euro in financing from the Cohesion Fund and the European Regional Development Fund.
The programme also contained the so-called Regional and Local Accessibility axis, which was set to finance the rebuilding and modernisation of regional and local infrastructure alongside the improvement of the information and communications networks in the country.
The main beneficiaries are expected to be the National Road Infrastructure Fund and 86 municipalities. The winning projects were likely to be the construction of roads to facilitate access to under-developed locations and industrial zones.
Building international roads to ensure better connectivity in regional and continental terms was just as important. At present, five of the large European transport corridors cross Bulgaria and the country should join multi-country projects that would give Bulgaria access to other transportation corridors, the head of the cargo department at Bulgarian State Railways, Gencho Popov, said. Funds under the Transport operational programme should be used to this effect.
Transportation
Bulgaria’s deputy transport minister Georgi Peturneichev agreed that European funds were essential for the development of all types of transportation in the country. Special attention was paid to inter-modal and railway transportation as part of pan-EU efforts to intensify these transportation sub-segments. He said that the Transport operational programme was expected to distribute 2.3 billion euro in the 2007-2013 period.
Peturneichev highlighted the importance of PPP as means to finance both infrastructure and transportation projects.
Popov took it further predicting the rise of cargo transportation via railway in the future as part of a pan-EU trend. He presented a forecast that by 2017 internal transportation was set to increase the railway cargo volumes by 72 per cent.
ICT & Administration
The improvement of public services passed through the deployment of information technologies and the upgrade of equipment, the panel on Information and Communication Technologies in South-Eastern Europe: strategic issues on the scientific and technological development heard.
Among projects of top priority in this regard was the e-government project (www.egov.bg), which was set to make the Bulgarian administration accessible 24 hours a day, 365 days a year Yuri Alkalai, head of the e-government department at the Ministry of State Administration and Administrative Reform said.
He said that the project had already been given regulatory go-ahead by Parliament through the approval of the Bulgarian National Framework for Operational Compatibility, the e-Trade Act and the e-Government Act. In the past two years, e-government projects had received nearly 25 million leva in funds.
In addition, the state administration had upgraded its IT equipment with 3500 PCs and servers, 60 000 licensed software and 2150 electronic signatures.
Bulgaria should also concentrate on upgrading IT in the production sector, as well as on retaining young talent in the country, said Sasha Bezuhanova, HP Bulgaria managing director.
For this reason, Bulgaria should not only invest into local R&D activity, but also join related international networks aimed at promoting education.
The World Bank for Bulgaria
The summit hosted a special panel dedicated to the WB’s financial contribution to Bulgaria’s economic development. The Bulgarian Deputy Regional Development and Public Works Director Dimcho Mihalevski said the WB had already provided three loans – the first for the support of road infrastructure, one for regional development and the third for the improvement of the water sector. All three were in the absorption stage.
The Bulgarian government and the World Bank were also preparing the paperwork on a three-component loan. The first would finance projects aimed at preparing development projects, which are to procure financing through operational programmes. The second would finance the revamp and extension of the sewerage infrastructure in six regional sewerage holdings. The third would be for the completion and rehabilitation of dams and tap water purification installations.
The WB commited to finance 82 per cent of this project and the Bulgarian government the remainder.
Conclusion
The summit also tackled capital markets and the need to build links with related markets to ensure a generation of new securities and attract more stock exchange investors.
Guido Paolucci, head of CEI’s project secretariat, told participants that sustainable development was the overarching goal for all CEI countries and development in individual sectors were all elements of this mosaic.
Next year, the CEI summit will take place in Chisinau, Moldova.