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Respect for the rule of law is a problem No. 1 for foreign investors in our country. Corruption is endemic, especially for large infrastructure projects and the energy sector.
These are the main findings of the periodic report of the United States Department of State on the investment climate in countries around the world.
Other barriers to investment are the unpredictability of the environment due to frequent regulatory and legislative changes, as well as the slowness of the judicial system.
An American company cannot go into power
The State Department is concerned about the willingness of the Bulgarian government to honor its agreements, including with American investors. Apparently, this refers to the contracts with the US plants, so the cabinet has indicated several times that it wants to try to break them.
Furthermore, according to the report, an anonymous US company faces “long-term regulatory hurdles” in its attempts to enter the Bulgarian energy market and compete with Russia’s state monopoly.
“Bulgaria is seen by many investors as an attractive destination with government incentives for new investments. The country continues to offer one of the cheapest labor in the EU and low and flat corporate and income taxes. However, the steady increase of wages is far ahead of the pace. Growth in labor productivity may gradually undermine this competitive advantage, “the State Department wrote.
The report notes Bulgaria’s accession to the eurozone ERM II waiting room, noting that the adoption of the euro would completely eliminate currency risk and help reduce transaction costs with some of the country’s key trading partners.
There is a lack of legal restrictions on foreign ownership or control of companies and growth in software development, business process outsourcing, and technical support services. The IT outsourcing and back office sectors have attracted several US and European companies in Bulgaria and many of them have created global and regional service centers in the country. US and foreign investors have been interested in the automotive sector in recent years.
Bulgaria does not select investments in accordance with national security
In general, there are no restrictions for foreign and local private entities to establish and own a business in Bulgaria, according to the report. The Offshore Companies Act lists 28 activities (including public procurement, exploitation of natural resources, national park management, banking, insurance) prohibited for companies registered in offshore areas with more than ten percent foreign participation. However, it should be noted that this law allows these companies to do business if the physical owners of the parent company are Bulgarian citizens and are known to the public, if the shares are publicly traded, or if the parent company is registered in a country with which Bulgaria has agreements. to avoid double taxation.
Bulgaria does not have a specific law or an established mechanism to verify individual foreign investments. A potential foreign investment may be considered based on the potential risk to national security or through the Anti-Money Laundering Measures Act. As of April 2020, Bulgaria has not taken concrete steps to implement the EU’s investment evaluation directive of April 2019, according to the report.
It also claims that the state-owned Bulgarian Development Bank (BRD) has committed to supporting small and medium-sized enterprises in Bulgaria, but the recent granting of loans to large companies puts this in doubt.
Complex regulatory environment
According to the report, the regulatory environment in Bulgaria is characterized by complexity, lack of transparency, and arbitrary or weak implementation. These factors create incentives for corruption. Bulgarian legislation provides for 38 activities that are subject to licensing. Public procurement rules are sometimes tailored to certain local business interests. The law requires that all provisions be substantiated (with respect to national security, environmental protection, or the personal and material rights of citizens) and that an analysis of the costs and benefits of each proposed legislation be carried out. However, this is often overlooked when parliament considers bills.
The country’s budget is evaluated as transparent and in accordance with international standards and principles. Data on government debt is publicly available, but data on debt accumulated by state-owned companies is not, according to the report.
Politically motivated investigations
The judiciary remains one of the most unreliable institutions in the country, with widespread reports of nepotism, corruption, and undue political and business influence. Despite some improvements, the busiest courts in Sofia continue to suffer severe delays, limited resources and ineffective procedures that prevent prompt and fair justice, and trials often take years.
Although Bulgaria has adequate resources to enforce property and contractual rights in accordance with local law, in practice the public governance of investment disputes is slow and often requires the highest level of intervention. Investors believe that jurisprudence is inconsistent and that national legislation is used to deter competition from foreign investors.
The Department of State pays special attention to the Commission for the Defense of Competition, which is tasked with monitoring competition in the market and compliance with the Competition Protection Act. According to the report, the Law on the Protection of Competition is applied inconsistently and the CPC is perceived as an object of influence that exceeds its powers.
With regard to the fight against corruption, it is emphasized that there has been some progress in the fight against petty corruption. Widespread corruption at a higher level, especially in public procurement and the use of EU funds, remains one of the most difficult problems in the investment climate in Bulgaria.
Human trafficking, drug and smuggling channels contribute to corruption in the country. Although it has the necessary legislation and specialized institutions in the fight against corruption, the investigative capacity of law enforcement agencies remains limited and authorities often choose low-level, easy-to-prove cases. As a result, Bulgaria has yet to convict a corrupt senior official. There are several cases of high public interest, such as the alleged drainage of millions from the state treasury or EU funds, in particular those involving public tenders for large energy and infrastructure projects. Court investigations are often perceived as selective or politically motivated and generally end in acquittals after a lengthy trial.
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