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Guest opinion: Why do foreign investors leave Bulgaria, as if it was the Titanic?

Despite being one of the most beautiful countries in the European Union, despite having talented and educated people, despite a favourable tax climate, Bulgaria is likely to stay as the poorest in the EU, and to continue losing its population, writes Blaga Thavard.

Blaga Thavard is attorney at law, Sofia Bar, lawyer at Pappas & Associates, Brussels.

Foreign investment is a paramount indicator of the economic health of a country. Indeed, international investors enjoy an important freedom of choice, and are the first to leave a country not going in a healthy economic direction. Between 2008 and 2018, foreign direct investment in Bulgaria collapsed, dropping from 28% to 2% of GDP, or $9 billion to just $1.13 billion.

One of the reasons this is happening is that the oligarchic system which includes the key government officials hates foreign investors – they are seen as troublemakers, because they complain to their capitals, to the Commission… It’s so easier with Bulgarian companies – they accept to suffer in silence.

Indeed, the only reason for an investment is the return on this investment. Therefore, there are two type of investment – there is the risky investment which are yielding high return but can lead to loses, and there is the safe investment which a yielding low profit but with very little risks. Bulgaria is making an astounding demonstration of strength by proposing an environment yielding low profits with high risks. This environment has led to dramatic fall in foreign direct investment in recent years.

It is a paradox, given that following its 2007 EU accession, Bulgaria was seen by investors as having a favourable foreign investment regime that included government incentives for new investment and low or flat corporate and income taxes. Also, Bulgaria still offers some of the least expensive qualified labour in Europe.

One of the reasons that could be identified is the bad image of the country’s judicial system, illustrated among others in the insolvency case of two subsidiaries of the French Belvedere Group and the suspension of their boards. In 2014, two of the subsidiaries of this French owned company got involved in legal proceedings following a payment dispute with a local company.

Due to the non-payment of two invoices, the local company lodged a request for insolvency. Then, despite the subsidiaries showing evidences of solvency and the will to solve the issue amicably, the judge in charge of the case took preliminary measures of freezing bank accounts of the companies and replacing their managing bodies with an administrator appointed directly by the judge. It turned out that these measures were deemed illegally taken by the second-degree court and were then annulled.

This process of judicial “Company grabbing” has become known to the international business community. In the case at hand, thanks to the activism of the French Ambassador, the administrator lost his license, and the judge got removed from the judicial body.

Was it corruption or incompetence? In both cases, this was not conducive to a good image of the Bulgarian legal system. As it has been revealed by WikiLeaks, a former US ambassador mentioned the case in one of his reports. But even worse than the bad image given to the Bulgarian legal environment, the weak political response has been the most worrying. Despite the government seeing that this possibility for a low level judge to remove the governing body of a company without any fast and immediate recourse opened to a defendant, and therefore opening the possibility of this “company grabbing” situation, the only answer from the government has been to order few reports, without any reinforcement of the guarantees and legal rights given to company owners and investors.

This poor design of the insolvency procedure also opens the question of the quality of the legislation in general in Bulgaria, which in many occasions has proven to be in contradiction with EU principles. This has been mostly visible in the difficulty of Bulgaria to align its legislation on the European legislation.

Bulgaria has been accumulating proceeding opened by the European Commission for failure to fulfil its obligations according to the European Treaties, and mostly so by failing to implement Directives correctly in its national legal corpus. Again recently, decided to launch six new procedures against Bulgaria for poorly implemented Directives and decision was taken to take other procedures to the judicial phase in front of the EU Court of Justice in Luxembourg. While every EU Member is subject to these procedures and the difficulty for the country to transpose legislation correctly is concerning, as eventually it means that the legislation will change regularly, leading to a real legal uncertainty. The lack of a stable legislative frame is a major downturn for investors which are looking for stability of the environment above all.

The third issue affecting foreign investment in Bulgaria is the corruption plaguing the country.

Bulgaria is currently again ranked as the most corrupt EU member state according to perceptions, by Transparency International. The report is based on the polling of experts from around the world on topics such as a free press, integrity, and independent judiciaries. In 2015, the European Commission found that Bulgaria had done almost nothing to stem the tide of corruption and organized crime. A poll of Bulgarians indicated that 76% believe that political parties are corrupts, and 86% believe that the judiciary is corrupt.

Unfortunately, in its next reports the Juncker Commission decided it has enough other problems and kept its eyes closed on Bulgaria.

The situation in Bulgaria is particularly challenging because of the scale of the problem and of the government refusing to see this issue as a problem. Bulgarian authorities have indeed a habit of covering up abuses and disregarding recommendations for improvement. Even more, Bulgarian authorities do their best to avoid investigation. One of the most striking corruption scandals – the so called Yaneva Gate from 2015- have seen recordings of conversation between high level judges being leaked on the website of the Bulgarian partner of the organized crime and corruption reporting project. The records reveal conversation on how to decide cases and in whose interest. These revelations did not lead to any inquiry as it was deemed that the recordings were made illegally.

This case is revealing of the trend in Bulgaria. Lot of revelations are being made, lot of charges for corruption are brought by the prosecution, but the conviction rate is close to zero. This is not merely an issue the citizens are facing. The high level of corruption means effectively that no real economic competition can take place in a country, as companies close to the decision-makers will have advantages against any newcomers, even if they are leading international companies. In addition, it renders the bloated Bulgarian administration even slower, harder to navigate and unpredictable. Many foreign investors learned the lesson and left.

This is how Bulgaria has managed to achieve an extraordinary feat. Despite being one of the most beautiful countries in the European Union, despite having talented and educated people, despite a favourable tax climate, it is likely to stay as the poorest in the EU, and to continue losing its population.

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