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Policy and Legal Environment for the Growth of the SME Sector in Bulgaria
 

 

 

1.2 ACTION LINE 1.2: POLICY FOR ENCOURAGING AND SUPPORT OF THE SMALL AND MEDIUM ENTERPRISES

1.2.1 BACKGROUND
1.2.2 OBJECTIVES
1.2.3 ACTIONS
SME DEFINITION
INSTITUTIONAL INFRASTRUCTURE
SUPPORT SYSTEM
FINANCIAL ASSISTANCE AND RELIEF
FOREIGN ECONOMIC POLICY
1.2.4 EXPECTED RESULTS

1.2.1 BACKGROUND

The state administration has not implemented a consistent, long term strategy for the creation of the appropriate environment to promote SME development, and for the attainment of competitive power and European standards. On the contrary, policies are now in place that directly frustrate the development of the SME sector. The ultimate effect of which is the continuous expansion of corruption and lowering of legitimate entrepreneurial goals.

 

1.2.2 OBJECTIVES

The objective of this action line is to strengthen the SME sector by creating institutions and policies designed to provide direct support, unification, information and guidance currently unavailable for SMEs. In light of the present economic conditions, the needs of SMEs have become more pronounced and this has resulted in an urgent need to establish a competitive environment in agreement with European standards and regulations.

 

1.2.3 ACTIONS

The actions foresee:

  1. the development of a clear definition of SMEs, along the lines of those proposed by the European Union, through which a proper framework of support for the SME sector can be based (SME DEFINITION).
  2. the building of an institutional infrastructure for encouraging and supporting SMEs (INSTITUTIONAL INFRASTRUCTURE).
  3. the implementation of a consistent policy of support measures and relieves for SMEs (SUPPORT SYSTEM).
  4. the development of a program for the financial assistance and relief for the SMEs according to the general economic conditions in the country (FINANCIAL ASSISTANCE AND RELIEF).
  5. the development of a foreign economic policy for the attraction of government support for the SME sector (FOREIGN ECONOMIC POLICY).

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SME DEFINITION

Background

Recent definition of SMEs under section 1.1 of the Law for the State Bank for Investment and Development is as follows: Small size enterprises is defined as those enterprises with no more than 50 employees and a balance value of its long-term material assets not exceeding 5,000 times the national average monthly salary. Medium size enterprise is defined as those enterprises with no more than 100 employees and a balance value of its long-term material assets not exceeding 10,000 times the national average monthly salary.

The definition adopted by the European Commission is as follows: SMEs are defined as enterprises which have fewer than 250 employees, and have either an annual turnover not exceeding ecu 40 million, or an annual balance-sheet total not exceeding ecu 27 million. When necessary to distinguish between small and medium sized enterprises, a small enterprise is defined as an enterprise which has fewer than 50 employees and has either an annual turnover not exceeding ecu 7 million or an annual balance sheet total net exceeding ecu 5 million. In addition, to be classified as an SME, an enterprise must also conform to the criterion for independence which states that independent enterprises are those which are not owned as to 25 per cent or more of the capital or the voting rights by one enterprise, or jointly by several enterprises, falling outside the definition of an SME or a small enterprise, whichever may apply.

Recommendation

The development of a clear and appropriate Bulgarian legal definition of SMEs is needed through which a proper framework of support for the SME sector can be based. This definition needs to also incorporate to a large extent those definitions that have been adopted by international institutions. Such a definition is essential for two reasons. First, from a domestic standpoint, the country needs to clearly define its SME sector so that Bulgarian SME programs, policies and laws can be implemented with distinct constituents. Second, from an international standpoint, there has recently been significant international institutional recognition and interest in the promotion of the SME sector as a means to further development. Therefore, without a definition of SMEs that incorporates international definition, Bulgarian SMEs may be excluded from capital and assistance designated under international definitions for SME development.

In light of the European agreement for association and subsequent commitments, legislation must be harmonized with that of the EC. As such, it is necessary to include the independence criterion in the Bulgarian definition of an SME. The lack of this criterion creates a situation in which a Bulgarian holding company or other economic associations could be established and receive the benefits of a SME status.

 

INSTITUTIONAL INFRASTRUCTURE

Background

A Bulgarian institutional infrastructure to support and encourage the development of the SME sector is severely lacking. Few public institutions authorized to carry out economic functions have a special policy for SMEs. State and political powers are aimed at creating formal governmental unions; undermining the motivation to create independent unions. Lobbying is either highly fragmented or reduced to serving personal and narrow political interests.

Recommendation

Currently, the most feasible action to create institutional infrastructure is one that demands minimal financial expense but gathers governmental-wide support. The solving of this problem is a question political will. The roles of both state and private institutions must be addressed in the overall formulation of a dependable institutional infrastructure.

A centralized structure requires the governmental addition of an agency or commission to address the needs of SMEs. The primary advantage of this approach is the consolidation of information and resources into one "address" for entrepreneurs and international investors to visit. However, the proliferation of Bulgarian agencies has significantly reduced the efficiency of specialized organizations. These problems are the result of competition between the agencies, a lack of synchronized effort and generally deficient agency regulation. It should be noted that while a government agency may have certain advantages, such as deep pockets, access to information, and hopefully, legislative support, such institutions are often subject to significant political pressures. Political concerns often hinder the free flow of information and resources to businesses in the form of lack of funding, restrictive policies, and government programs that support or discriminate against particular sectors of the economy.

As a result, it has become increasingly important to develop self-organized SME associations, institutions and unions that provide similar assistance that would be found at government agencies. Maintaining independence provides the ability to exercise pressure upon the state and allows them to run more efficiently. In creating such bodies, it will be necessary that clearly defined policies regarding state relations, forms of dialogue and use of their expertise are created. In addition, criteria for the legitimacy of business associations must be formulated and their independence guaranteed.

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SUPPORT SYSTEM

Background

From the viewpoint of the process of integration of Bulgaria in the European economic marketplace, and of the weight SMEs have in developed democracies, the formation of a competitive environment has to become a priority in the strategy of the state. This is an essential prerequisite for catching up with the European standards. However, hostility of the state towards private business has been displayed not only in its failure to create adequate, coordinated support systems for the Bulgarian SME sector, but also in its generally insulting political attitude and its lack of desire for dialogue.

However, when implemented, SME programs have proven successful. Two such programs are administered by the Ministry of Industry and funded by PHARE. The Ministry of Industry established regional development agencies in Burgas and Smolyan to provide seminars, training programs, consulting, information servicing and project funding, such as a tourism development project in Burgas. In addition, two business centers were created in Russe (transportation) and Plovdiv (food industry), to assist in the development of those economic sectors. Other Ministry of Industry programs include financial support of entrepreneurs in the participation of international business events and a company support program to provide expert assistance in the areas such as market research and business planning.

Recommendation

Once a clear anti-crisis program and a concrete implementation of structural reform is underway, it will be necessary to outline the spheres in which SMEs will use certain privileges, advantages and concessions. This approach should be legally decreed in the Public Procurement Law.

A common system of concessions and encouragement measures for SMEs must be created which include the creation of "business incubators" to provide trade, financial and technological information servicing; relieved procedures of registration, licensing and administrative service; relieves for renting of offices and working premises; training support; assistance in the creation of associations and the creation of "innovation poles" to transfer technologies and act as mediators between the research centers and SMEs. Appendix #1 lists alternative forms of government assistance and support structures implemented in different countries for the development of SMEs.

The basic idea of state assisted centers of business development and technological transfer is the exploitation of synergy effects through the horizontal and vertical co-operation between firms. The networking and clustering of firms can contribute to a reduction of costs for individual enterprises, both though the introduction of work-sharing processes and also, in the area of overheads, through the common usage of business-related infrastructure.

Further, support institutions should be linked with international support programs, such as the Firm Level Assistance Group ("FLAG"). FLAG is a consortium of seven organizations that provide volunteer experts, consultants, trainers and US study trips. Attention needs to be made to develop mutually beneficial relationships between Bulgarian support institutions and international programs by providing linkages between those enterprises that need technical assistance and those organizations that are looking to supply it. Such efforts will increase the effectiveness and penetration of already successful programs, such as FLAG.

Access to new technologies and advanced know-how has become an essential component of economic competitiveness, particularly for SMEs. In this respect, the existence of an adequate information program or infrastructure for the dissemination of research and technological developments on a national and international level is of great importance. An example of such an infrastructure is the network of 52 innovation relay centers in the European Union Members States, which commenced operations in late 1995. These centers promote innovation by bringing research and technology closer to companies, especially SMEs, and by encouraging the participation of additional industry and research centers in the European RTD programs. In Bulgaria, such a center is now being established under the INCO-COPERNICUS Program of the EU. The Fellow Member to the Community Innovation Relay Center ("FEMIRC") is an alliance between two government agencies, the Ministry of Industry and the Agency for Economic Coordination and Development, and the Applied Research and Communications Fund, the Bulgarian Academy of Sciences and the Bulgarian Industrial Association. Through FERMIC's services, Bulgarian SMEs will receive information and advice on RTD programs, funding opportunities, and the use of RTD results; consultancy on the development of proposals for specific projects and direct assistance in partner searches; and technological assistance, including the identification of external technology suppliers and in the absorption of new technologies.

 

FINANCIAL ASSISTANCE AND RELIEF

Background

Although plans for the development of the Bulgarian financial and insurance sectors are in progress, they lack a consistent and coherent strategy for the support of the SME sector. Absent adequate sources of capital, credit guarantees, insurance, and other quintessential financial tools, the development of the SME sector will continue to fail miserably. Fundamental to this system is a viable banking industry, insurance and securities industry, and pension and mutual funds that are capable of supporting the financial and credit needs of SMEs.

Recommendation

Concurrent with the aforementioned general procedures for financial stabilization under Action Line 1.1, a long-term agenda must be implemented for the financial relief of the starting and strengthening of SMEs in light of a clear program of structural reform.

In addition to the general restructuring of financial institutions in which must exist a strategy to meet the needs of SMEs, a special Fund should be created to provide, among other things, credit guarantees for the SMEs, export insurance and guarantees, partial financing of "business incubators," partial financing of the innovation centers for SMEs, direct and indirect financial support training and expansion.

In accordance with the already stated principles for guaranteeing the independence of SMEs, this could be a mixed fund with state and private participation. For example, the capital for the fund could be supplied from the government, while the administration of the fund could be sub-contracted to private enterprises. In addition, if private funds are solicited for the Fund, private pressures could help to alleviate governmental political pressure that undermines the effectiveness of the fund. In addition, an active foreign investment policy should focus in part on international development sources of capital which could be designated for the Fund. Concrete Fund policies, objectives and lending guidelines will aid in the attraction of much needed development capital.

The Fund should also be structured on a regional principle, with a certain regulated autonomy of regional structures. This will create a competitive environment at an inter-regional level, and provoke the municipality authorities into providing support for the SMEs. The local social and business structures will also be motivated to contribute for the fund-raising.

Other financial support systems for SMEs that need to be incorporated into the national policy for economic development as it emerges are special state assistance for SMEs operating in developing or poor regions; financial and tax concessions for the introduction of technologies, establishment of new working places, and improvement in the qualification of the employees; systems for encouraging and guaranteeing risk enterprises; normalization of the insurance system and the introduction of specialized insurance techniques for SMEs; systems for credit guarantees; and tax provisions that support large corporations that act as "accidental credit banks" for SMEs. Finally, it is extreamly important to remove legislative burdens that prevent the formation of enterprise funds, foreign and domestic, to supply additional funding to SMEs.

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FOREIGN ECONOMIC POLICY

Background

Another element of public policy which hinders the development of SMEs is the inadequate cooperation with the international financial institutions. For example, the EBRD has provided 90% of its support to the public sector and only 10% to the private sector even though the bank was created to support the two sectors proportionally 40% and 60%, respectively. With that in mind, the European Union has also been reviewing its policies for the support of developing economies and has recognized the importance of allocating resources for the development of the SME sectors. The lack of such a policy is especially emphasized when regional cooperation is considered; SMEs could play an important role in international cooperation.

Recommendation

The support for SMEs should be accented in the country’s foreign economic policy. Specific areas of concern are as follows:

  1. The attraction of aid for SMEs, both technical and financial, should develop on a bilateral and multilateral basis, and focus on international organizations and financial institutions;
  2. Special attention needs to be paid to SMEs in the common system for the encouragement of exports (if such priorities exist in the state);
  3. Informational provisions and promotion have to be developed such as the use of trade counselors at the diplomatic missions.
  4. Special provisions must exist for the inclusion of SMEs in the schemes of international guarantees; and
  5. The priority of SMEs in the development of regional and international partnership must be emphasized.

 

1.2.4 EXPECTED RESULTS

The expected results of these recommendations will be the creation of a support network and the removal of obstacles, common to all private businesses, but particularly relevant to SMEs. By providing SMEs with adequate representation and acknowledgment through the creation of applicable government and private support structures, the implementation of other supporting strategies can commence. Common resource centers, either business incubators or innovation poles, will provide information servicing and coordination activities.

The final expectations of such projects are the creation of a network of support institutions, policies and programs that will make the Bulgarian SME sector competitive, both domestically and in the international market.

 


 
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