EU-Report Accession Bulgaria

Chapter 15: Industrial policy

Progress made since the last Regular Report

Since the last Regular Report, Bulgaria has made further progress with the development of industrial policy, aiming at promotion of investment and competitiveness in a marketoriented economy.

As regards industrial strategy, the government presented in March 2002 a policy document entitled ``Industry 2002''.. It concentrates on macro-economic trends and underlines the Government's commitment to restructure and further enhance liberalisation of the economy by privatisation, and to focus on factors that contribute to the overall competitiveness and stability of the economy. In addition to several horizontal industrial policy principles, the Ministry of Economy has also identified branches that are considered particularly promising as regards bringing extra added value to Bulgaria's industrial output. Amongst the sectors identified are IT, tourism, energy, textiles and clothing, other manufacturing products and food processing.

Since last year, government policy has again focused mainly on investment promotion, in particular through reduction of taxes. No major progress has been achieved on simplification of legal and administrative procedures for taxation.

In 2001 the real growth rate of fixed capital formation was 19.9% and the share of gross fixed capital formation in GDP reached 17.8%. In 2002, Bulgaria witnessed lower foreign investments than expected, amounting to only about EUR 230 million for the first half of the year. Apart from the global macro-economic situation, this is partly due to lower revenues from privatisation deals which ­ following the implementation of new procedures after the adoption of a new Law on Privatisation and Post Privatisation Control in April 2002 ­- only became more substantial since the summer 2002.

Concerning privatisation and restructuring, the privatisation process is almost complete for the large industrial enterprises in the major sectors. Some problems remain with post-privatisation control (e.g. non-compliance with contractual obligations by new owners) and the viability of several management-buy-out companies.

The restructuring of the steel industry remains incomplete. The authorities have asked for an extension of the grace period as laid down in Protocol II of the Europe Agreement. In order to allow a decision to be taken on this extension, a global restructuring plan needs to be provided and positively assessed. The authorities have emphasised that the steel industry does not receive state aid any more and have made progress in enforcing state aid rules in this respect, notably the write-off of debts and payment arrears to public utilities (see also chapter 6 ­ Competition policy).

The liquidation of non-viable state-owned enterprises is continuing.

Regarding administrative structures, there has been progress in streamlining administrative procedures and improving the qualification of staff in the Foreign Investment Agency, though its participation in policy-making decisions remained limited.

Overall assessment

Bulgaria should continue its efforts to seek participation of the business community and the financial sector in policy making. Strengthening its competitiveness with a view to integrating its enterprise sector into the Single Market remains one of the main challenges the country faces. Whilst a Council for Economic Growth has been created, in which the business community is only selectively represented, attempts to create a functioning structure to further integrate the business community in the policy-making process should be further encouraged.

During the last couple of years investments in manufacturing have increased and diversified.

It is uncertain whether steps taken so far to restructure the steel industry are sufficient to ensure medium-term viability. Arrears of payments of certain companies to public utilities and the State administration should be subject to enhanced state aid control. Restructuring of the steel industry remains a challenge that needs to be tackled in order to fulfil Bulgaria's obligations under the Europe Agreement as regards state aid in the sector.

The central body responsible for the formulation and co-ordination of industrial policy is the Ministry of Economy. The Ministry generally tries to develop a pro-active approach to industrial policy for the sectors under its responsibility. It needs to continue and improve close co-operation with the various other public institutions involved in this area, such as the Agency for Small and Medium-Sized Enterprises, the Privatisation Agency, the Foreign Investment Agency, the Bulgarian Trade Promotion Agency and the Bulgarian Export Insurance Agency, as well as with non-governmental organisations, such as chambers of commerce, professional chambers, unions and business associations. While the necessary administrative bodies have been established, the administrative structure in this area still remains too fragmented. The Ministry of Economy should strengthen its role as co-ordinator and delegate tasks for implementation to the agencies involved.

The development of business associations and their top-level organisations in Bulgaria needs to be further encouraged and streamlined. Over the past years, Bulgaria has witnessed the proliferation and increasing activity of these business associations and significant improvement in their dialogue with the Government. A tripartite dialogue has now been institutionalised with enterprise and trade union representatives. These efforts can only be encouraged but should also be reflected at the level of firms.

It should be noted that an important element of any industrial policy is the control of state aid and the compatibility of support schemes with EC rules (see also Chapter 6 Competition policy).

Conclusion

In its 1997 Opinion, the Commission concluded that the integration into the European market would pose serious difficulties for Bulgarian industry in the medium term. In addition, many sectors were facing important restructuring and privatisation needs. A major potential impediment to restructuring and diversification efforts was the lack of investment capital due to the low levels of foreign investment and the bad debt situation, which restricted the banking system's capacity to provide capital.

Since the Opinion, Bulgaria has made progress in most areas, and Bulgaria's policy towards industry generally complies with the principles of EC industrial policy, i.e. it is market-based, stable and predictable.

Negotiations on this chapter have been provisionally closed. Bulgaria has not requested any transitional arrangements in this field. Bulgaria is generally meeting the commitments it has made in the accession negotiations in this domain.

Bulgaria should focus further efforts on the speedy completion of privatisation, the restructuring process of some remaining important industrial sectors, such as steel, attracting foreign capital into the country, further co-ordinating its currently rather fragmented administrative structures and further enhancing the business environment and competitiveness in the enterprise sector so as to achieve full integration into the Single Market. Great care will have to be taken that the policy of restructuring is implemented in a manner which conforms to the competition and state aid acquis so as to create efficient competitive firms.

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