FT SPECIAL REPORT Investing in Bulgaria Tuesday November 29 2016 www.ft.com/reports | @ftreports

Mr Radev,who speaks fluent English, German and Russian and studied in the Inside US at the Air War College in Alabama, pledgedthataspresidenthewouldwork Reliance on Russian Vacuum at the to end EU sanctions against Moscow for its annexation of Crimea and interven- gas almost over tionineasternUkraine.Healsostressed Bulgaria and its Bulgaria’s commitment to the western system, saying its membership of the neighbours are building EU and Nato is not negotiable. He cross-border pipelines top threatens added: “But to be pro-European doesn’t Page 2 necessarilymeanbeinganti-Russian.” Despite widespread dissatisfaction German-style ‘grand’ with both main parties, Gerb is likely to beat the Socialists at a general election coalition looks unlikely to hinder but would not be able to win an outright The curtain seems to majority, says Ognian Shentov, chair- be coming down on man of the Center for the Study of Democracy,aSofiathink-tank.“Borisov Borisov era will come back with a strong counter- Page 3 progress attack [following the presidential defeat],”he says. “Gerb also has an edge outsideSofiaandothercities.” Gerb controls three-quarters of The new president’s first move will be to call a municipalities and local government officialshaveensuredthatEUlargesseis general election, explains KerinHope spread as widely as possible, especially inregionsofhighunemployment. ulgaria’sreputation for politi- Borisov as Tsetska Tsacheva, Gerb’s Few observers predict that Gerb Country faces drastic cal stability compared with presidential candidate and the speaker would be able to capture more than a skills shortage some of its neighbours has ofparliament,hadbeenhisownchoice. 25-27 per cent share of the vote. That come under threat after this While the Bulgarian presidency is not would leave Mr Borisov struggling to Industry-sponsored month’s election of Rumen a US or French-style executive position, form another coalition government training will help fulfil BRadev, a former national air force chief itcarriessomemeaningfulpowers,such under the pressure of a looming dead- high-tech needs withnopreviouspoliticalexperience,as as the right to reject legislation and the line:BulgariaisduetotakeovertheEU’s Page 3 president, by an unexpectedly large taskofbrokeringtheformationofanew six-month rotating presidency in Janu- margin. government at times of political disar- ary 2018 and will need time to prepare Mr Radev, an independent candidate ray. Mr Borisov’s resignation leaves the foritsEuropeanresponsibilities. Vibrant start-up scene backed by the pro-Russian Socialist country without effective leadership Most of Gerb’s half dozen possible attracts interest party, appealed to many voters as a and with no chance of holding an elec- coalition partners seem unappealing. patriot without connections to the tionbeforenextAprilattheearliest. Echoing Europe’s rising populist trend, But more private finance country’s mistrusted political class. His According to the constitution, outgo- Rumen Radev: ‘Pro-European does not mean being anti-Russian’ — Darko Vojinovic/AP threeso-called“patrioticparties”repre- is the key to persuading popularity soared when he piloted a ing head of state Rosen Plevneliev can- senting rightwingers of different stripes companies to stay MiG-29 fighter jet in an aerobatics dis- not call another election so close to the togetheracaretakerleadershipuntilMr represents the latest example of have gained ground, even though only Page 3 play at an aviation show outside Sofia end of his term. Also Mr Radev can only Radev takes over,after which Mr Radev Moscow’s influence in a country that one, the ultranationalist IMRO, is likely two years ago. The performance fix an election date after he takes office will have to do the same. In an effort to wastheSovietUnion’sclosestsatellitein tocaptureasignificantshareofthevote. attractedmorethan1mYouTubeviews. on January 22 and it must be set for two avoid this, Mr Plevneliev has called for the communist period and remains The fractious Reformist Bloc, Gerb’s Auto parts industry Even before the election result was monthslater. “consultations” with a cross-party largely dependent on Russian natural natural ally as the other main pro-Euro- powers up confirmed, Boyko Borisov, the prime The country faces the awkward pros- groupofseniorpoliticians,includingMr gas. Opinion polls show that more than pean party,may not meet the 4 per cent The number of minister, announced his resignation as pectofbeingrunbytwosuccessivecare- Radev, in what would be the first test of two-thirds of Bulgarians have positive ofthevotethresholdforenteringparlia- head of a coalition government led by taker administrations. Following the the president-elect’spolitical independ- feelings towards Russia, which is cred- ment.Otherwise,thereistheMovement component makers has his centre-right Gerb party. The vote electedprimeminister’sresignation,Mr encefromhisSocialistbackers. ited with liberating the country from for Rights and Freedoms, representing doubled since 2012 was seen as a personal defeat for Mr Plevneliev is responsible for putting To some observers in Sofia, Mr Radev Ottomanruleinthelate19thcentury. Continuedonpage2 Page 4 Foreign investors must look beyond enduring problems

GDP growth and FDI Forum’s latest competitiveness report. Business environment But WEF ranks it at only 110th and GDP growth FDI stock (bn) 115th when it comes to independence of The government has made ()  the judiciary and security of property efforts to encourage foreign rights. companies, but the travails   Sofia-based lawyers advise their for- eign clients preparing to sign a contract of one UK-based property   with a local partner to insist on a clause company illustrate potential permitting arbitration outside Bulgaria   in the case of a dispute. To reduce risk difficulties, says Kerin Hope further, they also suggest setting up an investment partnership abroad, so that   only the operating company is based in Bulgariaremainslessappealingtointer- Bulgaria. national companies than its larger   “When it comes to property rights neighbour Romania across the Danube, outside the special economic zones our yet investment flows steadily into a - advice is to make sure that title deeds variety of sectors, from automotive are translated and that a history of title components and IT to logistics and food -  transactions is compiled,” one lawyer processing. says. Foreign direct investment stock, a     ThetravailsofEastBalkanProperties, measure of the total amount of foreign FT graphic Sources: IMF; Unctad a UK-based property company, under- investment in a country at a given time, score the risks associated with investing has risen from $23bn in 2006, before and services, long a source of friction in a poorly regulated property market Bulgaria joined the EU, to $42bn in with foreign companies preparing to where there are doubts about judicial 2015, although it is down from its 2013 entertheBulgarianmarket. independence. peak of $51bn, according to Unctad, the The situation is already markedly dif- Until February, Glorient Investment UN body overseeing trade and develop- ferent in the fast-growing technology Bulgaria, a local affiliate of East Balkan ment.Thefallininvestmentwaslargely sector: start-ups, outsourcing compa- that specialises in building retail duetothecollapseofaprivateBulgarian nies and software developers are all premises, was receiving rent regularly bank which had several foreign share- exempt from most licensing require- from 22 outlets of Technomarket, a holders and the shrinking of operations ments. Bulgarian electrical goods retailer from bysubsidiariesofanAthens-basedbank “The IT sector in particular is getting whom it bought the properties 10 years hithardbytheGreekcrisis,accordingto seriousinvestmentpartlybecauseofthe ago. anindependentconsultantinSofia. skilled workforce available but also But now Glorient says NSN Invest- Ontheotherhand,newinvestmentin because these companies don’t have to ment, a company that acquired Tech- manufacturing and services has shown go through a permitting regime,” says nomarket early this year, is suing Glori- a modest increase rising from €1.2bn in Alex Nestor, vice-president of the ent claiming its deals with the retailer 2010 to €1.6bn in 2015, according to American Chamber of Commerce in are invalid and the properties still data collected by InvestBulgaria, the Sofia. belong to Technomarket. Rents on the government agency for promoting for- However, despite making progress outlets have not been paid since the dis- eigninvestment. with governance since EU accession in pute began, according to Glorient’slaw- Investors will be taking advantage of 2007,thereisstillmuchtobedone. yer. low wage costs and a flat tax rate of 10 “It’s well known that Bulgaria has “We’re extremely worried about this per cent on corporate profits and per- problems with high-level corruption in breachofpropertyrightsinanEUmem- sonalincome,the lowestintheEU. politics and the justice system, we are ber state,”says Michael Uhler, East Bal- “We’re a natural bridge between east kan managing director. Glorient is con- and west . . . Companies can invest in testing NSN’s claims in court in Bul- Bulgaria and expand across Europe,” garia. says Stamen Yanev, executive director Investors benefit from NSN could not be reached for com- ofInvestBulgaria.Hegesturestowardsa low wage costs and a flat mentaboutthedispute. map of Bulgaria depicting a swath of Despite the UK property owner’scur- specialeconomiczonesacrossthecoun- tax rate of 10% — the rent predicament, Sofia-based observ- try where investors are allowed to buy lowest in the EU ers say the majority of partnerships landbelowmarketprices. between Bulgarian and international In regions of high unemployment, publicly castigated by the EU in this businesses now operate more smoothly investors also enjoy tax breaks on rein- respect. But successive governments thanpreviously. vested profits and subsidies on social have been reluctant to address this It helps that international chambers insurancepayments,hesays. problem,” says a Sofia-based lawyer of commerce, sectoral business associa- Efforts are under way to accelerate speakingonconditionofanonymity. tions and western diplomats lobby procedures for issuing of permits and Bulgaria is ranked 50th overall out of actively on behalf of investors facing licences to investors in manufacturing 138 countries in the World Economic problems. 2 ★ FINANCIALTIMES Tuesday 29 November 2016 Investing in Bulgaria Russian gas dependency almost over

Energy Gas pipeline Bulgaria and its EU Under construction partners have made progress on cross- border pipeline routes and other projects, ROMANIA writes Tony Barber SERBIA Vacuum at othing better illustrates Gas Interconnector Bulgaria’s fast-changing Greece-Bulgaria BULGARIA Black Sea top threatens energy prospects than the (ICGB pipeline) Sofia confidence with which gov- ernment ministers and Plovdiv to hinder Nindustry specialists predict the end of their nation’s almost complete depend- enceonRussiannaturalgas. ITALY progress In January 2009, Bulgarian citizens TURKEY shivered and industry shuddered to a halt when a Russian-Ukrainian dispute Continuedfrompage1 abruptly cut off Russian gas piped GREECE the country’s ethnic Turkish minority through Ukraine to central and eastern Trans Trans-Anatolian and a powerful group of local business- Europe. For the EU, it was a shock to see Adriatic natural gas men with interests in construction, howvulnerablenewmemberstates,lib- banking and energy, which are control- erated in 1989 from Soviet political con- pipeline pipeline ledthrough opaque networks of compa- trol,weretoaRussiangasembargo. (TAP) (Tanap) nies. In several past governments the According to Temenujka Petkova, the MRFhasheldthebalanceofpower. outgoing energy minister, Bulgaria and While still the EU’s poorest country, its EU partners have absorbed the les- heldbackbycorruptpracticesandweak son of the 2009 crisis. “We’ve worked in  m Mediterranean Sea institutions,Bulgariahasmadeprogress a focused way to avert a similar situa- under Mr Borisov, a former bodyguard tion by going for diversification of who got his start in politics as mayor of routes and sources of supply. Our energy analyst who served as Bulgaria’s company, plans to start piping gas to Less encouraging is the state of play Sofiaandenteredparliamentin2009. actions are within an overall EU energy ambassador to Russia from 2000 to Bulgariain2020. with the Belene nuclear power plant, Though the economy shrank by 5.5 policy framework. There’s no way we’ll 2006.MrVassilevsaysBulgaria’sannual Domestic oil exploration adds east of Kozloduy, cancelled primarily per cent that year in the global reces- reach a 2009-type situation again,”says gasconsumptioncouldriseto4bncubic another dimension to Bulgaria’s quest due to spiralling costs. An international sion, Bulgaria avoided an international MsPetkova. metres in 2020 from roughly 3bn cubic for energy independence. A consortium arbitration court ruled in June that Bul- bailout, unlike Romania, Serbia and Gazprom of Russia, which is the sole metres today,partly because of growing led by Total of France, and including garia must pay Atomstroyexport, Rus- Greece. It has since achieved annual exporter of gas to Bulgaria, supplies demand from chemical and fertiliser Austria’s OMV and Repsol of Spain, dis- sia’s nuclear equipment company, output growth of 1-2 per cent; this year’s more than 90 per cent of the Balkan companies. Yet by 2020 Gazprom will closed in October that it had found oil €620m in compensation for cancelling growth projection has been revised nation’sannual gas consumption. Over- probably supply only about half of Bul- offBulgaria’sBlackSeashelf. theproject.MsPetkovasaysthegovern- upwards to 3 per cent, driven by rising all, Bulgaria depends on Russian garia’sgas,heestimates. Ms Petkova says she has high hopes ment hopes for a private sector investor confidence and consumption. A cur- imports for three-quarters of its pri- The first operational cross-border not only for this part of the Black Sea, to salvage the project and manage the rency board set up 20 years ago, which mary energy resources — coal, gas, pipeline connects Bulgaria with Roma- but also for a neighbouring deepwater plant on free-market principles. How- pegs the lev to the euro, remains an eco- nuclearfuelandoil. nia. In terms of volumes of gas deliv- block where Shell, the Anglo-Dutch ever, the government is unwilling to nomicanchor. However, with EU and US support, ered, however, the most important will company, was awarded a five-year per- offer sovereign guarantees for complet- Theunemploymentrate,at7percent the outgoing centre-right government be the Interconnector Greece-Bulgaria mitinFebruarytodrillforoil. ing construction or to commit itself to in the third quarter, is at a seven-year has made progress on reducing Bul- (ICGB), a €220m project on which Ms The outlook for Bulgaria’s nuclear buying electricity from the plant at a low, while in fast-growing regions such garia’srelianceonRussianenergy. Petkova says construction will start powersectorismoremixed.Onthepos- ‘Gazprom fixedlong-termprice,shesays. asthecapitalSofiaandPlovdiv,amanu- The most ambitious plans involve the next year, with completion due by late itive side, a recent inspection of the is in no Given the very high costs of nuclear facturing and high-tech centre in the opening of cross-border pipeline routes 2018orearly2019. Kozloduy plant, 120km north of Sofia projects, these conditions may be unre- south, it stands at 4.5 per cent, accord- with four neighbours — Greece, Roma- “The ICGB is our highest priority,”the ontheDanuberiver,showedthatthelife position to alistic. “Any nuclear project these days ingtoprivatesectoreconomists. nia, Serbia and Turkey — and a joint ministersays.“Itwillcreaterealdiversi- oftheplant’sUnit5reactorcanbesafely play the gas needs government involvement,” says Bojidar Lukarski, the outgoing econ- Bulgarian-Greek project to build an off- fication of supply. The source of the gas extended for 30 years. Ms Petkova says Alexander Bebov, managing partner at omyminister, isconfidentBulgariaison shore liquefied natural gas terminal in willbetheCaspianSea.” she expects similar approval for Unit 6, card any Balkan Advisory Company, which spe- the way to achieving sustained higher the northern Greek port of Alexan- Withthisinmind,Bulgariahassigned theplant’sotherreactor. more, cialisesintheenergymarket. growth rates through increased invest- droupolis. a contract with Azerbaijan for the If inspectors give the green light, the Yet the option of abandoning the ment. “We’ve put a lot of effort into pro- “Gazprom is in absolutely no position annual delivery of 1bn cubic metres of two reactors, which produce about a threatening project and selling off Belene’s equip- viding a sustainable business environ- to play the gas card any more, threaten- gas from the Shah Deniz 2 field in the third of Bulgaria’s electricity, will be anyone’ ment is not straightforward, either. ment and attracting foreign investors,” ing anyone,” says Ilian Vassilev, an Caspian. Socar, the Azerbaijani state oil operationaluntilthelate2040s. “Whowouldbuyit?”saysMrBebov. he says, “[and] we’ve significantly reducedtheadministrativeburden.” Buoyed by the success of an EU- backed programme to fund small and medium-sized enterprises and start- ups, a second round of financing for such businesses is included in Bulgaria’s Start-up capitalises on burst of current €10bn package of European financingforthe2014-20period. “Wehaveanambitiousprogrammeto activity in climbing gyms achieveaneconomicshifttowardsinno- vative production,” Mr Lukarski says. Bulgaria’semerging role as a technology gymsand“funwalls”forbeginners (€5,000)ofearningsfromtheirplastic hub is enabling it to retain skilled IT Profile proliferateacrossEuropeandtheUS. bagcompany. workersandbringbackhighly-qualified “We’reseeingexplosivegrowthin Walltopiastilldoesallits Bulgariansworkingabroad,hesays. Walltopia’s founders expect climbinggymsandmostofthe manufacturinginBulgaria,employing Yet further structural reforms are this year’s profits to exceed momentumiscomingfromtheUS,”he morethan200workersatthree needed for the country to have a chance says.“Climbinghasbecomea factoriesaroundthevillageofLetnitsa of catching up with higher-income €10m as interest in the sport mainstreamsportinthelastfiveyears.” intheDanubevalley.Itstailor-made states in central Europe. One priority is booms, writes Kerin Hope Walltopiahasdiversifiedfrom products,whichcanbedismantledand to address high-level corruption, which producingartificialwallstoproviding reused,areshippedbycontainerand permeates politics and the judiciary indoortrainingfacilitiestodevotees. erectedon-sitebyaspecialisedteamof accordingtotheEuropeanCommission. IvayloPenchevlearnedrock-climbing Nowbrightlycolouredfunwallswith Walltopiaworkersdispatchedfrom The outgoing government countered onthevertiginouscliffsofhishome paddedfloorsaredesignedtolooklike Bulgaria. criticism by stressing progress made in town,VelikoTarnovoincentral medievalcastlesorbeanstalks. Climbingwallsandbouldering crackingdownontaxevasionandsmug- Bulgaria,butneverimaginedthathis Boulderingproducts,whichsimulate “courses”comein16colours,including gling.Acriticaltaskforthenext adminis- weekendpursuitwouldbecomeaglobal rock-climbingatlowerheights,without vibranttonesoforange,turquoiseand tration will be to boost the effectiveness business. theuseofropesandharnesses,arealso violet.“Colourcanmakeallthe of a newly established independent Walltopia,founded18yearsagobyMr increasinglypopular. differencetocustomerfootfallina Scaling heights: the company is adding 30 per cent more wall surface each year agencysetuptofightcorruption. PenchevandhisschoolfriendMetin MrPenchevsaysheandMrMusov, climbinggym,”MrPenchevsays. Regardless of planned reform efforts, Musov,hasbecometheworld’sleading bothfromimpoverishedfamilies, Walltopiahasdevelopedaspecial than€60m.“We’regrowingatmore infrastructureandspecialised however,the next few months are likely manufacturerandassemblerof becameentrepreneursoutofnecessity. coatingforitswallstorepelblackmarks than30percentayearintermsof manufacturingincentralandeastern tobefrustratingforinvestors. prefabricatedclimbingwallsforgyms, “Iwasatheoreticalphysicsstudentat leftbythestickyrubber-soledshoes climbingwallsurface.” Europe.Walltopiaisitsfirstinvestment “It’s quite clear . . . private projects mallsandadventureparks,withmore SofiaUniversitybutIwasalwaysbroke. wornbyclimberstogivethemtraction. Lastyearthetwopartnerssolda inBulgaria. under development will face delays than1,300completedprojectsinover MyfirstbusinesswithMetinwasselling Ithasacquiredamajoritystakein minoritystakeinWalltopiato “We’reseenasacompanywithgood because of the political situation and 50countries. plasticbagsonthestreetintheearly Composite-X,aBulgariancompany BlackPeakCapital,aBulgarianprivate growthprospects,”MrPenchevsays. new ones will get postponed,” says MrPenchevclaimstohave 1990s.” whichmakesthehandholdsusedby equityfund,andCEEEquityPartners, “We’removingintodevelopingand Georgi Ganev, an economist at the revolutionisedafragmentedbusiness MrPenchevdroppedoutofuniversity climberstogripwalls.Itsowngymin investmentadvisertoChinaCentraland managingadventureand Centre for Liberal Strategies, a Sofia- thatcateredtoanichesportfordiehard tostartWalltopia.HeandMrMusov Sofiatestsandshowcasesnewproducts. EasternEuropeInvestmentCo- entertainmentparks.AndthePacific based think-tank. “This is going to have enthusiastsbutnowholdsamuch builttheirfirsttwoclimbingwallsina MrPenchevsaysprofitswillexceed operationFund.Thefund,whichis Rimisgoingtobeahugemarketinafew an impact on the growth forecast for broaderappeal,asspecialistclimbing Sofiagarage,financedwith10,000levs €10mthisyearonrevenuesofmore backedbyChina’sEximbank,investsin years’time.” nextyear.” Tuesday 29 November 2016 ★ FINANCIALTIMES 3 Investing in Bulgaria

2013, when street protests erupted over of grand coalitions. Gerb and the Social- high electricity prices and controversy ists are avowed rivals. Since the end of surrounded the appointment of a new communism and the first democratic headofthestatesecurityagency. multi-party elections in 1990, there has Surprise poll “People have vivid memories of the been only one grand coalition, formed mass demonstrations and political in 2005 to smooth Bulgaria’s entry into chaos of 2013,”says Kancho Stoychev of theEU. thepollstersGallupInternational. Last, there is no guarantee that Gerb “It is true that the present situation and the Socialists will win enough seats hasfewparallelswith2013,but,still,we to form a coalition with a solid parlia- result throws need to be careful,” says Daniel Smilov mentary majority. Gerb won 84 of par- of the Centre for Liberal Strategies, a liament’s240 seats in 2014, but this was Sofia think-tank. “Anew cycle of parlia- down from 97 in 2013. Mr Stoychev says mentary elections creates a lot of noise the party will struggle to pick up more inthewholesystem.” than 70 to 75 seats in the forthcoming future politics For this reason, some political com- elections. As for the Socialists, who are mentators say the most desirable out- descended from Bulgaria’s former Sovi- come of the elections would be a Ger- et-backed communist party, they may man-style “grand coalition” between win only 50 to 55 seats, Mr Stoychev the main centre-right and centre-left says. While this would be an improve- up in the air parties. These are Gerb (Citizens for the ment on the 39 seats that a Socialist-led European Development of Bulgaria), leftist electoral alliance won in 2014, it the party led by Mr Borisov, who sub- would hardly represent a thundering As PM resigns, a German-style ‘grand mitted his resignation after Mr Radev’s endorsement. Elections victory,andtheSocialistparty. An additional risk is that, as in other coalition’ begins to look unlikely, says Tony Barber Some investors are hopeful that a European countries, a power-sharing grand coalition would deliver positive arrangement between the centre-right surprises, for instance a deal to sort out period of political uncer- Although such a scenario is less than the future of the problematic Belene tainty is looming in Bul- ideal for Bulgaria’s investment climate, nuclear plant project in northern Bul- garia after the presidential benign economic conditions offer some garia. “We’ll see what happens with ‘New parliamentary election victory on Novem- protection.Theoutgoinggovernmentof Belene after we get clarity on the poli- ber 13 of Rumen Radev, a prime minister Boyko Borisov had a tics. I wouldn’t exclude the two main elections create a lot of Aformer commander of the nation’s air respectable record of steady economic parties reaching some agreement,”says noise in the whole system’ force,whowassupportedbytheopposi- growth, rising exports, low inflation, Alexander Bebov, managing partner at tion Socialist party.Mr Radev’striumph prudently managed public finances, Balkan Advisory Company, which spe- prompted the resignation of the centre- more efficient tax collection and cialisesintheenergymarket. and centre-left would strengthen sup- right government, which had held currencystability. However,thepathtoagrandcoalition port for anti-establishment populist power for two years, and opened the Mainstream politicians need no mayberocky.Inthefirstplace,themar- movements. door to early parliamentary elections, reminding, however, that the next gov- gin by which Mr Radev crushed Tsetska In Bulgaria’s case, the main anti- probablytobeheldinspring2017. ernment must be built to last. Bulgaria Tsacheva, his centre-right opponent, establishment threat comes from the These elections will be the third since will take over the EU’s six-month rotat- was so emphatic — he won by 59.4 per ultranationalist right, which has also May 2013. Like the previous two, they ingpresidencyinJanuary2018.Itwould cent to 36.2 per cent — that the result attracted support by whipping up pub- appear likely to produce a fragmented not be the best advertisement for the was a clear personal defeat for Mr Bori- licuneaseoverirregularmigrationfrom legislature. Opinion polls indicate that nation, which joined the EU in 2007, if sov.Ms Tsacheva, the speaker of parlia- Muslimcountries.Aradicalrightistcan- no party will come close to achieving an the government were to fall in the mid- ment, was Mr Borisov’s handpicked didate came third in the presidential outright majority in the 240-seat cham- dle of carrying out its duties on the candidate. There is a sense in Sofia that contest’s first round, with 15 per cent of ber.Delicate and possibly lengthy nego- Europeanstage. the curtains are falling on Bulgaria’s thevote.Anallianceofultranationalists tiations to form a coalition government In everyone’s mind is the long spell of Borisovera,whichdatesbackadecade. is expected to perform similarly well in mayfollow. instability that plagued Bulgaria in Opposition: supporters of the Socialists march in Sofia — Hristo Vladev/NurPhoto/Getty Images Second, Bulgaria has little experience theparliamentaryelections. Vibrant start-up scene Country faces drastic shortage attracts increasing interest of people with the right IT skills

€120m has been invested since 2013 in funding are readily available, warns Technology Funding companies backed by the programme, Evgeny Angelov, outgoing economic oneBulgarianofficialsays. adviser to the Bulgarian president and Government initiatives and More private financing is Butsuccessfulstart-ups,mostlybased chairman of the new association. “We industry partnerships are critical to prevent Bulgaria’s inthecapitalSofiaandaroundPlovdiv,a want our companies to stay here, do helping, write Theodor Troev new companies moving software and manufacturing centre in research and development for US com- thesouthofthecountry,faceachallenge panies and be plugged into the global and Angel Petrov abroad, writes Kerin Hope raisingsufficientfundstomaintainhigh innovationnetwork,”MrAngelovsays. ratesofgrowth. “We’ve become gatekeepers to the ElvinGurisealedhisreputationasasuc- Private equity and venture capital Bulgarian market . . . Increasingly Asacountrythathopestopositionitself cessful entrepreneur almost a decade investment into central Europe reached we’re seeing foreign funds come and as an information technology leader in ago, when BNP Paribas acquired JetFi- €1.6bn last year, a 25 per cent increase knockonourdoors,”saysLyubenBelov, southern Europe, Bulgaria is finding it nance, the consumer finance lender he compared to 2014, according to Invest founder of Launchub Ventures, a €20m difficulttokeepupwiththeaccelerating co-founded to help small borrowers in Europe, an association of investment fundthatwillfollowonfromhisexisting paceofdemandforskilledworkers. the Balkans buy new household appli- funds. But Bulgaria ranked sixth in the Jeremie-backedacceleratorfund. Thegovernment haspledgedtocreate ances. region, with €46m of investment in Rossen Ivanov, managing partner at 30,000 IT graduates in less than a dec- Up to speed: the education minister (far right) visits a vocational high school Now the Albanian-born former audi- 2015, behind its two Balkan neighbours BlackPeak Capital, a private equity ade, but the country is already facing a tor runs Empower Capital, one of a Serbia and Romania. This amount falls growth fund, says international inves- drastic shortage of people with the right courses, so that students will no longer employers to work together. The con- handful of Sofia-based venture capital far below the country’s potential, tors entering the Bulgarian market are skillsandexperience. be required to study IT courses at a cept is developing a model involving IT and private equity funds that are driv- according to members of the newly cre- looking for export-oriented ventures Telecommunications and the output vocationaltradecollege. and manufacturing companies in the ing investment both in medium-sized ated Bulgarian Private Equity and Ven- with high growth rates or companies of hardware and software accounted for “An important component missing in nearby Trakia Economic Zone (TEZ), Bulgarian companies in manufacturing tureCapitalAssociation. thatoccupyaspecificniche. around3percentofBulgaria’seconomy the education system is teamwork with one of the most successful such enter- and services and the country’s flourish- Empower Capital’s Mr Guri puts the BlackPeak’s €31m portfolio includes last year. The software industry alone is business,” says Emiliyan Kadiyski, a prisesinBulgaria. ingstart-upsector. potential for private equity investment Walltopia, a world leader in the making estimated to have reached 1.8 per cent part-timeITtutorinVratsainBulgaria’s “There is a gap between employers’ “The small size of the [Bulgarian] acrosssouth-eastEuropeat€5.6bn. of climbing wall; Software Group, a glo- of GDP in 2015, a fivefold increase com- poorestnorth-westernregion. plans and the output of vocational high market doesn’t reflect the level of com- Sofia-basedfundsarepoisedtopartic- bal vendor of microfinance, banking pared to 10 years earlier, says Stamen When he is not teaching, he divides schools,” says Georgi Stoeff, a Plovdiv- panies’ competence and sophistica- ipate in a second EIF funding round to and telecoms software; and Interna- Kotchkov, who chairs Basscom, the histimebetweenworkingforanITcom- based economist and EIB co-founder. tion,”MrGurisays. be launched in January, again with tional Power Supply (IPS), an award- industry association of leading software pany and the Vratsa Software commu- “TEZgivessuccessfulmodelsofintegra- Daniel Tomov, founder of Eleven, a co-financing from the government. winning producer of off-grid power developmentcompanies. nity, an organisation he founded that tion between employers and schools, €12mstart-upacceleratorandseedven- Fund managers in the association fore- managementsystems. Industry figures say education should providesITcourses. suchasanemployeradoptingaclassina ture fund backed by the EU’s Jeremie cast another €100m-€150m will be Mark Crandall, a US energy specialist be targeted to address particular skills Other training initiatives are also vocational school and providing programme for start-ups, argues that invested in the next two years both in based in Belgrade and founder of Post- gaps.ITcompaniesemploy40,000soft- under way. Last year, HP, the US tech resources and know-how for education with more early stage companies Scriptum Ventures, a venture capital ware engineers, but are struggling to conglomerate,openedahigh-techlabin inaparticularprofession.” emerging, private funding is becoming group that specialises in start-ups and findthousandsmore. Sofia that offers training facilities for One programme at a Plovdiv high morediversified. Elvin Guri: the niche investments mainly in the energy Thoughsome2,000universitygradu- nearbyuniversitiesandcolleges. school is run in co-operation with ABB, “Bulgariahasbeenchronicallyunder- companies are sector, has co-invested with BlackPeak ates of IT and computer science pro- Sibiz,ahigh-techcompanywithoper- the Swedish-Swiss engineering com- more competent financed in the past but the environ- than the small inIPSandSoftwareGroup. grammesenterthelabourmarketevery ations in the US and eastern Europe, is pany, which produces components for ment is changing. We have more angel market size “These are companies that have year, few of them have the particular building the Sibiz Technology Center, low and medium-voltage equipment in businesspeopleandmoreinvestorswill- indicates developed world-beating technologies skillsthatbusinessesneed. whichwillcombinebusinessandeduca- itsTEZunit. ing to help early stage companies,” Mr They have tremendous possibilities,” “Education reform begins in kinder- tionalfunctions. Industry group Basscom is also Tomovsays. start-ups and early stage companies MrCrandallsays. garten,”says Meglena Kuneva, outgoing “The success of Bulgaria’s high-tech involved in a vocational training project The EU’s Jeremie programme, seekingtofinancegrowth. The local funds have also teamed up deputy prime minister and minister of industry will depend on our ability to toturnoutappliedprogrammers. co-financed by the Bulgarian govern- However, increased amounts of pri- to co-invest in innovative companies education. “We passed legislation to generate the necessary capacity of rele- “If we are not able to build sufficient ment and managed by the European vate financing will be critical to making with potential to become global players. change approaches to teaching from vantly educated engineers,”says Roddy engineering capacity, this may lead to Investment Fund (EIF) and local accel- such businesses sustainable in the “We see companies growing every year pre-schooltouniversitiesandtoperme- Dervishev,chiefexecutiveofSibiz. stagnation, withdrawal of investments erator funds, which aid new businesses, longer term. Otherwise, they will head by two or three times,” says Zlatolina ateeducationwithtechnology.” Ms Kuneva is a founder of the Educa- and Bulgaria will not establish itself as a has helped make the country a thriving for the UK, Germany or the US, where Mukova, managing partner at Neveq 2, As part of its strategy, the ministry is tional-Industry Board (EIB), a Plovdiv high-tech destination,” Mr Dervishev hub for technological innovation. Some venture capital and private equity a€15mventurecapitalfund. working to widen access to IT training think-tank encouraging schools and says. 4 ★ FINANCIALTIMES Tuesday 29 November 2016 Investing in Bulgaria Auto parts industry powers up Automotive The number of component makers has doubled, but there is still no assembly plant, write Theodor Troev and Angel Petrov

he automotive parts indus- try has become one of the engines for Bulgaria’s national output, yet despite strong growth in the com- Tponents industry, the government is still waiting for a major overseas car manufacturertosetupavehicle-assem- blyplant. Contributors Nearly 100 enterprises in the auto partssectoremployover33,000people, Tony Barber producing components for over 20 Europe editor marques such as Peugeot, BMW and Mercedes, according to Automotive Kerin Hope Cluster Bulgaria, a non-profit organisa- Greece and south Balkans correspondent tion that represents companies in the industry. Testing times: producers, its auto industry still lags technical schools, and an industrial hub Mexico and China. “Plovdiv has started Theodor Troev The number of auto parts manufac- Sensata is behind neighbouring Romania and Ser- withinvestmentincentives. to transform into a high-tech manufac- FT contributor turers has doubled since 2012 as over- making use of bia, for example. There the automotive Plovdiv’s Trakia Economic Zone has turing hub and this should be an exam- seas companies have been drawn by high-skilled sector generates a higher proportion of attracted €1.2bn in greenfield invest- ple for the rest of the country,” says Angel Petrov Bulgaria’s low tax environment, cheap workers at its GDP and major car manufacturers have ment, of which about €500m has been Tommy Ver Elst, general manager for Freelance journalist labour and currency stability — the lev plant in Plovdiv’s alreadysetupassemblyplants. devoted to auto parts manufacturing, Bulgaria for Sensata Technologies, a is peggedtotheeuro. Trakia Economic Bulgariadidhaveonefactorythatwas according to Plamen Panchev, TEZ supplier of sensors and controls Emma Boyde “Automotive manufacturing is one of Zone assembling vehicles for China’s Great chairman. designed for leading automotive manu- Commissioning editor the priority high-technology sectors for Sensata Technologies Wall Motors, but production halted in UK-based springs and wire-forms facturers. attracting foreign investments here,” January. manufacturer William Hughes was an Recent moves have been attracting Steven Bird Bojidar Lukarski, Bulgaria’s outgoing The factory’s owner, Litex Motors, early entrant to the automotive parts more investors to Bulgaria’s manufac- Designer minister for the economy, told the FT. announced that lines were being industry in Bulgaria with the establish- turingcapacityintheautomotiveindus- “The legal framework gives administra- adjusted to produce new models. How- ment of a facility near Plovdiv in 2004. try, but at least one Bulgarian company Alan Knox tive and financial incentives to attract ever, the plant did not reopen in mid- Othercompanieshavefollowed,suchas hasdecidedtosetupabroad. Picture editor investors.” 2016asoriginallyindicated. Swedish-Swiss ABB, US-based Sensata Water Fuel Engineering is now a UK- Employingjust1percentofBulgaria’s Poor infrastructure is also a hurdle Technologies and Canada’sMagna Pow- based company that is using Bulgarian For advertising details, contact: workforce, last year the automotive facing all manufacturers. Some of Bul- ertrain, whose customers include BMW engineering know-how to develop and Elka Koleva, + 359 2981 0900 and parts industry generated €1.55bn in garia’s auto parts makers are located in ‘Our success andGeneralMotors. supplycleantechnologies. [email protected], or your usual FT sales, according to the ACB — over 3 per the north-west region of the country, in the UK “Over the past 12 months alone, five The company, which lists Bulgarian representative. centofgrossdomesticproduct. which is closest to western Europe and auto parts makers opened plants in and UK partners on its website, says its “The productivity of our automotive the capital Sofia but which is also the now creates TEZ,” Plovdiv deputy mayor Stefan HydroGen4.0canbeusedonvehiclesto All editorial content in this report is industry is four times the country’s EU’s poorest region. Infrastructure interest in Stoyanov says. “We expect this trend to reduce emissions by as much as 80 per produced by the FT. Our advertisers have average,” says Lubomir Stanislavov, needs to improve if more investment is continue and to welcome a European cent. no influence over or prior sight of the chiefexecutiveofACB. tobeattracted. Germany, carmaker.” Angel Nenov, WFE’s managing direc- articles. Although recent research produced There is another concentration of Turkey and In April, Sensata, which already had a tor, says: “The decision to move to the by the ACB in conjunction with Colliers companies around Plovdiv, Bulgaria’s plantemployingover2,000peoplenear UK was integral to our growth plans,” All FT Reports are available at: International and EY,the property and second-largestcity,towardsthesouthof in our native Botevgrad near Sofia, opened another adding: “Our success in the UK now cre- ft.com/reports consultancy companies, shows Bulgaria the country. Plovdiv offers access to Bulgaria’ one in the TEZ, turning Bulgaria into its ates interest in Germany, Tur- is a popular location for component skilled graduates of its universities and third-largest production base after key . . . andinournativeBulgaria.” Follow us on Twitter @ftreports