First Page Bulgaria.qxd 16/03/2004 17:02 Page 1 FAO INVESTMENT CENTRE / EBRD REPORT SERIES - N. 4 - JANUARY 2004 COOPERATION PROGRAMME Bulgaria Expanding ProCredit’s Operations in Rural Areas Study Supported Under the Balkan Region Special Fund Food and Agriculture Organization European Bank of the United Nations for Reconstruction and Development BULGARIA EXPANDING PROCREDIT’S OPERATIONS IN RURAL AREAS TABLE OF CONTENTS CURRENCY EQUIVALENTS/ABBREVIATIONS ....................................................................i EXECUTIVE SUMMARY........................................................................................................ii-ix 1. INTRODUCTION .................................................................................................................1 2. THE BULGARIAN AGRICULTURAL SECTOR............................................................3 A Summary of Key Features ................................................................................................3 Positive Factors for Rural Investment.......................................................................3 Negative Factors for Rural Investment .....................................................................6 3. DEMAND ASSESSMENT....................................................................................................8 Introduction ...........................................................................................................................8 Potential Borrowers...............................................................................................................8 Priority Regions...................................................................................................................11 Comparison of Some Sub-Sectors......................................................................................16 Diversity of Productive Enterprise Types ...............................................................16 Dairy Sector................................................................................................................16 Vegetable/Fruit Sector...............................................................................................17 Pork Meat Sector.......................................................................................................19 Wine and Grapevine Sector......................................................................................19 4. EXISTING SUPPLY OF BANK FINANCE TO FARMERS .........................................21 Farmers Do Not Have Ready Access to Bank Credit.......................................................21 The Supply of Agricultural Finance – The Constraints...................................................21 The Supply of Agricultural Finance – The Lenders.........................................................22 The Farmers’ Perception of the Existing Sources of Finance .........................................25 5. CONCLUSIONS AND RECOMMENDATIONS ............................................................26 General Recommendations (for EBRD)............................................................................26 A. Enriching Banking Services................................................................................26 B. Downstream Investments ....................................................................................27 Recommendations for ProCredit Bank.............................................................................27 A. Products and Operational Principles.................................................................27 B. Target Clientele....................................................................................................30 C. Marketing Issues..................................................................................................31 D. Staffing Issues.......................................................................................................34 E. Collaboration between ProCredit and Other Actors in Rural Development.35 BULGARIA: Expanding ProCredit’s Operations in Rural Areas ANNEXES: Annex 1 Characteristics of the Potential Demand for Rural Finance Annex 2 The Supply Market for Agricultural Credit Annex 3 Special Features of Bulgarian Agriculture (in summary) Annex 4 Agro Processing Annex 5 Sustainable Livelihoods Study of Haskovo and Dobrich Regions Annex 6 Contact Details of Potential Partners in Bulgaria 2 BULGARIA: Expanding ProCredit’s Operations in Rural Areas Currency Equivalents (2003) USD 1 = BGN 1.55 BGL EUR 1 = BGN 1.99 BGL Abbreviations BGN Bulgarian Leva dca Decare (1000 square metres) EUR European Euro GOB Government of Bulgaria ha Hectare JOBS Job Opportunities through Business Support LSP Livelihoods Support Programme MAF Ministry of Agriculture and Forestry PMRCA Private Mutual Rural Credit Associations SAPARD Special Accession Programme for Agriculture and Development SFA State Fund for Agriculture SME Small and Medium Enterprises UNDP United Nations Development Programme US$ United States Dollar i ACKNOWLEDGEMENTS This report was commissioned by the European Bank for Reconstruction and Development (EBRD) and carried out by the Investment Centre of the Food and Agriculture Organisation of the United Nations (FAO), under the co-operation agreement between the two institutions. The field mission took place between 16 and 29 August 2003 and was composed of Richard Roberts (Consultant), Vlaho Kojakovic (FAO), Frank Hollinger (FAO) and Magdalena Kaloianova (Consultant). Two further missions funded by the FAO Livelihoods Support Programme (LSP) of a duration of ten days took place in October and November 2003 to the regions of Haskovo and Dobrich. These missions were composed of Ida Christensen (FAO) and Albena Miteva (consultant). The missions would like to extend its warm thanks for the kind assistance it received from the National Agricultural Advisory Service (NAAS), especially from Margarita Nikolova (Executive Director) and Stanimir Stoycheff (General Secretary) and the regional staff in Plovdiv and Veliko Turnovo. Many thanks to Vitosha Research, especially to Alexander Stoyanov (Director) and Andrey Nonchev (Vize Director) for conducting a survey and accessing additional primary data from the field. The collaboration with ProCredit Bank, particularly by Susanne Decker, is highly appreciated. Many thanks also to Michail Halvadjiew (advisor of the PMRCAs) and Albena Mitova (national consultant) for the logistical support and useful information provided during and after the field work. BULGARIA: Expanding ProCredit’s Operations in Rural Areas EXECUTIVE SUMMARY General Findings (i) The focus of this exercise was on issues connected with a possible substantial increase in the agricultural loan asset portfolio of ProCredit Bank. This summary outlines the type of client who could be targeted by the bank – the core borrowing group, the ways in which the bank could market its services to the desired core clientele, the type of loans for which a demand is clear, the enterprise types for which credit-financed investment appears to be most profitable, the regional considerations and, finally, the personnel requirements within the bank. (ii) Some more general findings, listed at the end of the Executive Summary, could indicate areas where EBRD may want to investigate further, with a view to more substantial investments in Bulgarian primary industry, and downstream sectors. (iii) Agricultural sector investment opportunities exist in Bulgaria, but continuing structural problems, especially in the areas of land tenure and marketing, constrain the extent to which the full potential of the sector can be realised through investment in agricultural production alone. These problems will not remain as permanent features of Bulgarian agriculture; the investment climate can be expected to improve over time. (iv) Land tenure problems are being addressed, albeit slowly, and through gradual processes. The land restitution process is nearly completed since most entitled persons have already received individual ownership titles, and a unified register / cadastre system has been introduced. However, as a consequence of restitution, land ownership is highly fragmented constraining the emergence of a commercially viable farm sizes. The land purchase market is currently not active, for two principal reasons: firstly, owners are reluctant to sell, as they feel that land is currently under-valued (with an eye on EU accession). Moreover, there might be non-economic reasons constraining the supply. Secondly, potential buyers lack financial resources. Land rental markets, in turn, are quite active and most commercial farms operate mostly on rented land. As this trend will probably continue in the nearer future, constraints related to land rental markets merit special consideration. In this regards, two key problems should be flagged out: Land fragmentation causes high transaction costs for farmers, interested in leasing larger plots and investing in farm machinery/livestock, who currently have to deal with numerous small owners. The second is the difficulty of arranging leases for more than five to seven years, which is a necessary pre-condition for investment in long term farm enterprises, especially tree crops and vines. With an appropriate legal and administrative framework in place, lease contract could also serve as a collateral for loans, given the high level of transactions. (v) Marketing to the former Soviet bloc was the norm until a decade ago. Structures