2019 Annual summary report On state-owned public enterprises Table of contents The state as an owner Overview of the state’s portfolio Key reforms in 2019 The state as an active owner Financial statements Overview Financial results for year 2019 Information on public enterprises categorized as "large" Accounting notes THE STATE AS AN OWNER Overview of the state’s portfolio Within the meaning of the Law on Public Enterprises, state-owned public-interest enterprises are: commercial companies with more than 50 per cent of state shareholding, or the ones in which the state otherwise exercises a dominant influence; the subsidiaries of the above-mentioned commercial companies and of state-owned enterprises if through them the state controls more than 50 per cent of the voting shares/stock or otherwise exercises a dominant influence; state-owned enterprises established by dedicated acts on the grounds of Article 62[3] of the Commerce Act. In this annual report, the municipal public enterprises are not taken into account due to the fact that in them the property rights are exercised by the respective local self-government body and not by the state. The approach adopted by the law is in line with the OECD Guidelines on Corporate Governance of State- Owned Enterprises. The main goal of the state in public enterprises is to create maximum value for society through efficient management of resources, and for enterprises that have made public policy commitments - to ensure that these commitments are well implemented. The state's portfolio in public enterprises covers its shareholding in 258 enterprises, including subsidiaries from various sectors of the country's economy. In cases where a state-owned public enterprise controls more than 50 percent of the voting shares/stock or otherwise exercises a dominant influence in the capital of other enterprises, ie. there is a group, the whole group can be reported as one enterprise and in this case the state portfolio includes 174 public enterprises. Bodies exercising the rights of the state are the administrative bodies which by law or by order of the Council of Ministers exercise the rights of the state in the capital of public enterprises (ministers) and the public enterprise when exercising property rights in another public enterprise (holdings). According to the competence of the ministers, state-owned public enterprises (including the groups of enterprises) fall into 17 departments. The distribution of enterprises by departments does not completely coincide with their affiliation by industry. For example, the sector of economy includes enterprises from the branches of industry and trade, but also those from the branches of ecology and financial services. Several enterprises in the healthcare sector are included in the departments of transport, defence and youth and sports, as they specialize in servicing the respective circle of patients. For this reason, in this report the value of the government portfolio is illustrated in two charts - one by sector and the other - by industry. 2 Portfolio (by number of public entrprises) 64 34 18 15 10 6 6 5 3 3 3 2 1 1 1 1 1 According to the equity criterion, the shareholding of the state in the energy sector is the most important - 57%, followed by the transport sector - 20% and the economy - 11%. The share of other departments - regional development and public works (1%), agriculture, food and forests (2%), healthcare (3%), youth and sports (2%), education and science (01.%), defence (1 %), culture (2%), finance (0.1%), tourism, labor and social policy, internal and external affairs, environment and water - make up a total of 0.8% of the portfolio. Portfolio Energy, 57% (by sectors) Economy, 11% Transport, 20% Regional development, 1% Agriculture, Food and Forestry, 2% Health, 3% Youth and Sports, 2% Education and Science, 0.1% Defence, 1% Culture, 2% Finance, 0.1% Other, 0.8% This report applies the method of book value of equity for the assessment of public enterprises. Outside the privatization process and with the exception of the companies listed on the Bulgarian Stock Exchange, no assessment of the state shareholding by other methods has been made. 3 Value of the portfolio Agriculture Ecology Health 2% 0.1% (BGN million) 3% Services 21500 8.9% 21000 Construction 1% Energy 57% 20500 Transport 20% Industry 20000 8% 2015 2016 2017 2018 2019 In the state’s portfolio, 46 public enterprises are categorized as "large" according to the criteria in the Accountancy Act, according to which large enterprises are those that as of December 31 of the current reporting period exceed at least two of the following indicators: book value of assets - BGN 38,000,000; net sales revenues - BGN 76,000,000; average number of staff for the reporting period - 250 people. According to the legal form, 36 of them are commercial companies and 10 are state-owned enterprises. Breakdown by Ministry Commercial companies State- Total Ministries Total Direct state Subsidiaries owned number number shareholding enterprises MoEconomy 2 0 2 0 2 MoEnergy 8 1 7 1 9 MTITC 7 5 2 3 10 MYS 1 1 0 1 2 MAFF 1 1 0 5 6 MD 1 1 0 0 1 MRDPW 5 5 0 0 5 MC 1 1 0 0 1 MH 10 10 0 0 10 Total 36 25 11 10 46 The majority of state-owned public enterprises operate as commercial companies – 159 in number. State- owned enterprises within the meaning of Article 62[3] of the Commerce Act are 15 public enterprises. The main feature of state-owned enterprises is that the property provided to them by the state does not form capital to serve as collateral for their creditors (i.e. the property provided to them is not distributed in the number of shares/stocks with a fixed nominal value). Some of them apply a specific regulatory framework, defined in the special law with which they were created, which distinguishes them from both companies and each other. However, they are also registered in the commercial register and apply the provisions of the Accountancy Act. 4 Key reforms in 2019 On 26 September 2019, the National Assembly adopted the Law on Public Enterprises (promulgated, SG, No. 79 of 8 October 2019), which started the reform in the field of management of public enterprises. The purpose of the Law is to create a harmonized legal framework in which public enterprises operate and in which the rules for corporate governance and disclosure are the same for all. The Law on Public Enterprises regulates the manner of determining and publicly announcing the state policy in the field of public enterprises, the introduction of standards for their good corporate governance, as well as the obligations for disclosure and transparency of the activity of public enterprise management bodies. The bill was developed with the assistance of the Organization for Economic Co-operation and Development (OECD) in the framework of the project "Modernisation of the framework for management of state-owned enterprises in line with the good international practices" under the Structural Reform Support Programme of the European Union; the aim was to bring national legislation in compliance with the standards of the OECD Guidelines on Corporate Governance of State-Owned Enterprises. The Rules Implementing the Law on Public Enterprises (promulgated, SG, No. 40 of 5 May 2020) creates conditions for the implementation of the Law in its entirety, through the development of detailed rules regarding the following: . The content of the policy for the participation of the state in the public enterprises, provided in Article 10 of the Law, the order for its development, adoption and updating; . The activity of the Public Enterprises and Control Agency as a coordinating unit regarding the state public enterprises and its relations with the bodies exercising the rights of the state and the public enterprises themselves; . Special rules for the conclusion of certain types of contracts, which should be observed by the state public enterprises, in view of the fact that they are legal entities created with public funds; . The conditions and the order for conducting the competition procedure for selection of the members of the management and control bodies, according to Article 21 of the Law; . The assignment of the management and control of the public enterprises and the procedure for determining the remuneration of the members of the management and control bodies; . Defining the medium-term goals and the planned results of the activity of the public enterprises; . The scope of the obligation for public disclosure of financial and non-financial information by public enterprises in accordance with Article 28 of the Law. The state as an active owner The Constitution of the Republic of Bulgaria assigns to the Council of Ministers, as a body of the executive power, to manage the state property. The owner of the shares and stock in the public enterprises is the state. The rights of the state in the capital of public enterprises are exercised by the individual ministers in accordance with their sectoral competence by decision of the Council of Ministers, as well as by state- 5 owned public enterprises, when they control more than 50 percent of the voting shares/stock or otherwise exercise a dominant influence in the capital of other enterprises. Public enterprises play an important role in the economic and social life of the country. They are legal entities that are created and managed in the interest of citizens and society in order to achieve maximum value for society through efficient allocation of resources. Most of them operate in competitive markets and therefore, just like private companies in the long run, they must be efficient and profitable and able to grow.