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

 

 

2.2 ACTION LINE 2.2: IMPLEMENTING EXISTING LAWS AFFECTING SMALL AND MEDIUM SIZE ENTERPRISES

2.2.1 BACKGROUND
2.2.2 OBJECTIVES
2.2.3 ACTIONS
BANKRUPTCY LEGISLATION
REGISTERED PLEDGES LEGISLATION
PRIVATIZATION LEGISLATION
INTELLECTUAL PROPERTY RIGHTS ("IPRs") LEGISLATION
SECURITIES REGULATION LEGISLATION
2.2.4 EXPECTED RESULTS

2.2.1 BACKGROUND

Bulgarian Parliament has passed a number of laws relevant to the activity of SMEs that have not been effectively implemented. Failure to implement the laws has been due to a lack of relevant experience among implementing officials and representatives of SMEs (e.g., bankruptcy); the lack of an institutional framework to support the laws, (e.g., registered pledges); and legally fixed implementation procedures that slow down the process (e.g., privatization). In all such cases, SMEs suffer due to the inability of institutions and the private sector to implement, or act under, laws that are the result of already existing political consensus in society. Such laws are national capital that is being wasted by failure to use, resulting in loss of thousands of opportunities for SME development.

 

2.2.2 OBJECTIVES

Appropriate actions should be taken towards implementing existing and non-implemented legislation. Each sector, private and public, must do their part to become educated about how new laws function in order to obtain the desired results. Joint work needs to be done if interaction among SMEs and public institutions is to appear and bring to life new social mechanisms and functions.

 

2.2.3 ACTIONS

The actions foresee:

  1. the implementation of bankruptcy legislation (BANKRUPTCY LEGISLATION);
  2. the implementation of registered pledges legislation (REGISTERED PLEDGES LEGISLATION);
  3. the implementation of privatization legislation (PRIVATIZATION LEGISLATION);
  4. the implementation of intellectual properties rights legislation (IPRs LEGISLATION);
  5. the implementation of securities regulation legislation (SECURITIES REGULATION LEGISLATION).

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BANKRUPTCY LEGISLATION

Background

Liquidation and reorganization procedures are common features of developed market economies and are viewed as essential to the functioning of an efficient economy. Such procedures can also be used as methods of privatization. In August 1994, the law on bankruptcy came into force. The law allows for the restructuring or liquidating of insolvent companies. Later, because of the severe banking crisis, bankruptcy-of-banks and conservatorship legislation was passed.

Although Bulgarian courts and practitioners are generally experienced in insolvency law, they lack a full understanding of reorganization and bankruptcy, and conservatorship of banks. Few reorganization bankruptcy-of-banks cases have been filed under the new laws (and were not provided for under the old) and courts, practitioners, creditors and debtors will likely suffer because of initial inexperience.

Implementation of the law is often hindered by judicial and practitioner inexperience and government attempts to save large companies whose liquidation or even reorganization would boost social discontent and unemployment.

Recommendation

Bankruptcy courts and practitioners need to be trained in the intricacies of reorganization and bankruptcy-of-banks law. This training could be accomplished by traditional seminars and the "hands-on" experience of participating in test cases. An appropriate company or bank could be identified and taken through the process with training teams of appropriate judges, lawyers, trustees, conservators, creditors and debtors.

A large number of expected bankruptcies will most likely inundate Bulgaria’s fledgling bankruptcy court system. To prevent the overwhelming of the system, and accompanying delays, steps should be taken now to develop court technology including databases to inform courts, practitioners and the public of the status of pending bankruptcies. If such information is readily available, courts and practitioners will be able to better perform their jobs and public resistance to bankruptcy may decrease as some of its benefits become apparent.

 

REGISTERED PLEDGES LEGISLATION

Background

In early November, Parliament passed a new Law on Registered Pledges. Undoubtedly, this Law will greatly enhance the development of bank financing and other credit which will, in turn, positively affect SMEs. The implementation of this Law, however, requires hard and extensive preparatory work: designing of a registry institution; designing of a fully computerized, paperless registry system; implementing a reliable telecommunications system connecting the central database with local terminals; training registry officials into the implementation of a registry system run by administrators, not by judges. In this effort, the government will have to rely on private businesses in the fields of telecommunications, computers, information technologies, personnel management and others. The successful implementation of the central pledges registry will not only enable the implementation of the Law on Registered Pledges, but it will also serve as a pattern in designing future registries and reforming existing registries. The central pledges registry might become the core institution of a future merged registry for registering real estate transactions, commercial companies and other elements of a healthy SME legal environment.

Recommendation

The Government, under the Ministry of Justice, should invite proposals from relevant experts from business and academia, in order for it to design a modern and workable registry which could also serve as a model in reforming the registry system of Bulgaria. Legal experts drafting the secondary legislation that will govern the registry institution and procedures must work closely with technical experts. Once the technical facilities and the proper legal framework are in place, future registry officials and staff must be trained into running the registry. SMEs, banks and other private entities possibly to be affected by the new system should be educated, as well. The efforts of the Government, the SME sector and NGOs need to be coordinated to achieve a maximum effect of training.

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PRIVATIZATION LEGISLATION

Background

Bulgarian officials adopted a system of mass privatization in June 1994, which supplemented a market privatization scheme adopted in April 1992. However, Bulgaria has become known internationally for its slow and insufficient progress towards privatizing its industry. Obviously, an efficient privatization system will increase opportunities for SME creation and development. The undergoing first round of mass privatization demonstrated what a potential there is in converting existing state owned medium and small businesses into private SMEs. Market privatization holds the same potential. Successful implementation of privatization legislation will result in a big step towards creating a strong and significant SME sector in Bulgaria.

Recommendation

As stated in Action Line 1.1, Bulgarian authorities must pursue all privatization options including mass privatization, market privatization, combinations of the two and other methods such as bankruptcy liquidation. In addition, special attention needs to paid to implementing secondary legislation which has often stalled the privatization process. Special rules need to be designed for shortening the duration of privatization transactions development and completion. An open public dialogue needs to be initiated where SMEs, lawyers and economists from the private sector can discuss expedition techniques with the government.

 

INTELLECTUAL PROPERTY RIGHTS ("IPRs") LEGISLATION

Background

Bulgaria had become known for its lack of support and protection of IPRs. However, the government took quick and adequate action and currently Bulgaria is among the countries with most modern and complete legal framework for the protection of IPRs. Despite new legislation, the rate of IPRs violation still continues to be high.

Recommendations

IPRs legislation needs proper enforcement. Officials in IPRs enforcement agencies need to be trained to act in a more efficient manner against violators. Owners of IPRs need to be educated in the field of applying protection measures against violators. Better protection of IPRs will help the SME sector in two ways: SME owners of IPRs will receive strengthened protection creating greater incentives to pursue innovation and the unfavorable image of the Bulgaria’s SME sector as a generator of IPR violation will radically improve.

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SECURITIES REGULATION LEGISLATION

Background

New securities regulation legislation has been passed. Its first year of implementation demonstrates that the greatest hardships were derivec from the lack of proper capital market infrastructure.

Recommendation

As stated in Action Line 1.1, Bulgarian authorities must work to create a proper capital market infrastructure. Of critical importance is the creation and proper provision for a central depository for securities to serve as a single central locus for all securities transactions record keeping The SME sector will benefit significantly from a developed capital market which includes well working securities exchanges.

 

2.2.4 EXPECTED RESULTS

A lot of time, public energy and capital has been invested in creating new modern legislation. This investment continues to stay dormant while the Bulgarian SME sector suffers from lack of appropriate legal framework. This results in a multiplication of the loss to society as a whole. Bringing to life newly passed legislation as soon as possible will utilize a lot of investment that has been made by Bulgarian society and will sharply improve the legal conditions for SMEs and will increase the size and vitality of the emerging SME sector.


 
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