I. COMMERCIAL OVERVIEW (EXECUTIVE SUMMARY) A. Overview of Import Market Economies in transition share the promise of new and lucrative markets while generating all the frustrations and dilemmas associated with major economic change. Bulgaria is no exception, and perhaps presents more frustrations than some of the other transitional economies in Central Europe. Yet U.S. trade and investment in Bulgaria continues to expand premised on a strategy of Bulgaria's long-term growth potential. Despite being one of the smallest market's in the region, Bulgaria's market size has not been an issue for many American firms who are here to capture market share, given the newness of those markets and the less entrenched competition from European and domestic sources. Bulgaria lags behind the progress of Hungary, Poland, and the Czech Republic in market expansion. Historical distinctions can account for some of the differences, but much is due to home- grown Bulgarian political and economic deficiencies. Bulgaria remains officially on a market reform course, but implementation of many market policies are fraught with indecision and bureaucratic blockages. The paradox is that Bulgaria has a laudable legal framework; the Government's priority is that of privatization; and, Bulgaria welcomes and solicits investment and trade. However, the record of privatizations is minuscule, active support for foreign investment is missing, and official support for the stimulation of trade and investment through direct or indirect means is lacking. Despite the neglect, investment in Bulgarian has nonetheless drawn attention from many U.S. firms, especially American multi- national corporations, who have utilized Bulgaria's traditional skill base, or unique production facilities. In these instances, no special formulas were employed, rather on-site scrutiny by the U.S. partner has lead to the discovery of some key investment opportunities. Recent trends in U.S.-Bulgarian trade are also encouraging. U.S. trade grew 35% in 1993 over the previous year while Bulgarian exports to the U.S. doubled over the same period. Additionally, U.S. representative offices have more than doubled in the past three years. These trends bode well for future U.S. commercial interests as trade connections multiply and American firms become more familiar with Bulgaria and the Bulgarian market. Finally, the few U.S. investments currently in operation can be considered successes and therefore offer models for other U.S. firms. Many of the trade and investment challenges in Bulgaria are bureaucratic in nature and are surmountable, but most require time, energy, and expense to overcome and frequently tax the limits of proper business behavior. In sum, successful business in Bulgaria is attainable and, quite lucrative, judged by the growing and expanding presence of Western firms, but does demand a mixture of American ingenuity, Oriental patience, and a willingness to follow the meandering Balkan path of achieving objectives. B. Synopsis of the Commercial Environment In 1994, several events occurred which may set a more attractive commercial environment for U.S. trade and investment with Bulgaria. First, Western banks have up to now done little or no business in Bulgaria, awaiting a settlement by Bulgaria of its commercial debts inherited from the former Communist days. In June 1994, an agreement with the consortium of creditor banks - "London Club", was reached which clears the way for the normalization of Western banking activity. However, one area of concern regarding the debt settlement are the repayment terms which may create budgetary difficulties in future years. Nonetheless, the hoped for establishment of Western banking institutions should have a favorable impact on drawing trade and investment as well as stimulating the domestic banking community. In late spring 1994, Bulgaria announced a "mass privatization" program which also should be a major stimulus to the economy. This measure coupled with the enactment of a bankruptcy law should prod the economy into energizing its viable enterprises while accelerating the removal of unsalvageable ones. The Government is currently drawing together a list of a approx. 500 firms for proposed privatizations, with the general public to receive vouchers, or shares in those firms ala the Czech Republic model. A third sector of activity which has generated commercial activity is from the major international funding institutions. The World Bank, EBRD, and EIB among others have been heavily involved in Bulgaria's energy, transport, telecommunications, environment sectors. Many of these major projects are well along in implementation, and have drawn some of the best known firms in their fields' to Bulgaria. As a spin-off to such activity, service and support organizations such as accounting and advertising, personnel, and real estate firms have sprouted in the last several years. From the legal perspective, laws regarding foreign investment in Bulgaria are some of the most liberal in Eastern Europe. Establishing a firm is not onerous but it is advisable to retain a lawyer. The use of legal counsel/or recognized accounting, consulting firms is essential in instances of intricate business arrangements such as joint-ventures or manufacturing. Such activity frequently encounters a thicket of national/local bureaucracy. Credit reports, due diligence, and other background analyses are difficult if not impossible to obtain as such practices are new in Bulgaria. Moreover, the object business partners normally have only a limited business record for review. As a consequence, American firms should utilize as many resources as possible, including banking and personal references, Western business contact recommendations and, if possible a site visit to assess the situation first-hand. Poor business infrastructure is a challenge facing the all foreign business representatives in Bulgaria. Communications to and within Bulgaria are a constant source of frustration, with the system presenting an odd-mixture of both the sophisticated and dilapidated. Cellular phones, fiber optic cables, and soon to-be-available private satellites are on the current telecom menu. However, so is waiting for a dial tone for hours, or frequent misconnections. In fact, Bulgaria has one of the poorest call completion rates in Eastern Europe. While steps to remedy these inadequacies are being taken, as noted above, the American business representative today must be prepared for such conditions. Establishing an office can also be an ordeal in that demand for Western-class office space is high and the supply is quite limited. Many firms are in renovated but aging downtown properties with poor entrances and few lift capabilities. No new office construction sites are planned to open in 1994. C. Host Country Business Attitudes Toward the U.S. Most American firms are favorably impressed in their contacts with Bulgarian business representatives and Bulgarians in general. They find an openness and willingness to learn about Western marketing methods and an interest in becoming involved in new commercial ventures. In dealing with the emerging private sector, U.S. firms will find the private entrepreneur receptive, highly educated, and eager to participate with an American firm. In general, despite the ineffectualness of the bureaucracy, government officials are accessible and open to discussions with American representatives, frequently willing to make appointments on the spur of the moment. Such meetings often result in additional contacts and may gain some senior level attention, as well as general statements of support for projects. However, the Bulgarian Government is not providing any official or state guarantees for project financing, and there is no suggestion that this policy will change in the near future. The growing community of international and U.S.-connected firms is a major asset for new American firms. Regular meetings hosted by the U.S.-Embassy, called the "Ambassador's Roundtable" and a soon to be established American Chamber of Commerce can be used for networking, contacts, and for reference purposes. Several other international business groups also exist in-country as a support network for new firms. The U.S. & Foreign Commercial Service has also created an "American Business Incubator" for U.S. firms who need mid-to longer term office space, communications, and other business support. Such services are provided at either no charge or at special rates. Finally, for those interested in the major trade event of the year in Bulgaria - the Plovdiv Fall Fair - the U.S. & Foreign Commercial Service co-sponsors a U.S. Pavilion, which beginning in 1994 will have its own building. D. Major Business Opportunities After 45 years of mediocre and shoddy products, Bulgaria is not surprisingly a market of open demand for selection, quality, and service. Moreover, basic infrastructure is in a state of rapid decay; to name a few infrastructure needs: highways, railways, bridges, water reservoirs, district heating plants, hospitals etc. are all in need of modernization or construction. Pent-up consumer demand has resulted in a flurry of conspicuous consumption for expensive cars and cellular phones. In general, there are limitless quick turn-over opportunities (many of which are capitalized on by neighboring country enterprisers), but most are small-scale spot sales for electronics or luxury items which are dumped into an informal market net. Long-term stable market opportunities, ones that most U.S. firms follow here, are based on strategic market planning that takes into account Governmental priorities and policies, availability of international funding, long-term trends in industrial, professional, and consumer sectors as well as regional marketing plans. Governmental priorities are linked to the critical sectors of the economy, such as energy, agriculture, transport, and health among others. Recognizing that resource limitations still inhibit the market, there are other public-sector areas not resource-tied that hold high opportunities: tenders and competitions for broadcast and cable licenses, or revenue generating projects in such areas as environmental clean-up, BOT (build-operate- transfer) projects, or even local/municipal privatizations which are still under formulation and open to proposals. A second high potential area is that related to international developmental funding such as the World Bank, EBRD, EIB, as well as other national aid programs. U.S. firms should obtain project listings from these organizations as well as consider the U.S. Trade Development Agency (for feasibility study grants) as an entre into such major sector projects. Information on USTDA is provided later in this document VIII, sec. F). Finally, a third priority grouping is that targeted by the individual ministries, reflective of their respective spheres of activity i.e. tourism, environment etc. Hotel construction, development of tourist resorts, and tunnel projects are some examples of public sector commercial opportunities for which U.S. firms can compete. Private sector opportunities are especially promising given their rapid growth over the last few years. Private entrepreneurs operate over the full range of industrial, professional, and consumer sectors of the economy. For industry, the weakest of the three areas, major capital equipment demand may be low but efficiency-oriented, environmental control, and computer-aided products are in demand. In the professional sectors, office equipment, computer hardware and software, as well as medical/dental equipment are sought after. Bulgarians are well aware of the world leadership of U.S. products in these sectors. Consumer demand is strong but poorly met; only a few franchises exist in the fast-food restaurant sector. Barely a couple of food stores can be classed as supermarkets; and even the best department stores operate with uneven stocks subject to sporadic supply. Service is still too often on the surly side. But American firms are making inroads in many of these sectors, with direct marketing or distribution in such areas as: cosmetics and health care products; pharmaceuticals; or in the new car markets. E. Major Roadblocks to Doing Business The road to doing business in Bulgaria is strewn with potholes but no major roadblocks exist. For example, daily frustrations exist in trying to fax or phone a trading partner. The Bulgarian banking system still leaves much to be desired in comparison to Western banking practices and service. The bureaucracy poses another set of frustrations: the annoyance of not receiving a prompt response; passing responsibility for a decision to other offices; the inability to obtain a clear answer on steps to take in order to comply with regulations. Growing criminal activity poses yet another category of concern: thefts of personal property; the illicit importation of products which avoids duties and taxes and thereby makes legitimate products from U.S. firms uncompetitive; growing organized criminal activity involved in protection rackets, etc. Lastly, there is growing milieu of envy toward "Western" or any "successful" businesses leading to a practice of price gouging for normal services because such firms must have deep pockets. Yet in the normal conduct of business, relationships in Bulgaria are probably no worse nor better than any other foreign location. Standard precautions are advised such as written agreements and contracts, a good lawyer, realistic market expectations, and a gradual approach to new and untested business partners. Another cautionary note is that promising and supportive meetings with a few high level national officials, even Ministers, are indeed encouraging but no guarantee that business will actually result. A complimentary approach which coopts a wider circle of business contacts at all levels including the local mayor or the trade union leader as well as the key operational parties to the business arrangement will establish a broader base of support and be ultimately more effectual. Finally, such critical roadblocks to business such as political violence, expropriation of property, inability to transfer funds, or blatant anti- Americanism are not of concern in Bulgaria. F. Nature of Local and Third Country Competition U.S. firms have an advantage, at least for the next few years, in that competition is comparatively weak in many sectors. Firms should be aware however, that while the field may be relatively open, the market can be complex and difficult to gauge given the past market distortions. For example, despite a public that is well educated and skilled, the population has had to endure 45 years of bland products, poor choice, and pricing unrelated to supply and demand. In the major turnaround to a market economy, both domestic and foreign firms have launched Western-style marketing programs, sales techniques, promotional campaigns, and various pricing strategies. Such market strategies may require some flexibility or a period of market adjustment for programs to be fully realized. The need for consumer or target audience re- education may be as much of a factor in Bulgaria as the degree of competition. As a result, the full market potential of Bulgaria is difficult to quickly gauge and should be viewed on a longer term developmental basis. In terms of the traditional elements of competition, Bulgaria's basic industries and her historic trading partners are the key factors. Among Bulgaria's traditional sectors are agricultural production such as fruits and vegetables; derivative products such as wines, fruit liquors, rose oil essences and rose products; in the manufactured sector, Bulgaria's strengths are: textiles, furniture, electronic and electric components, confectionery manufacturing, fixtures, bricks/tiles, and other light industry; forklift trucks; heavy metallurgy; mining; tourism; chemical; pharmaceutical; and petroleum production. Bulgaria's traditional trading partners have been the former Soviet Union and bloc countries (nearly 80%). Additionally, strong trading links had been established with the former Yugoslavia, North Africa and the Middle Eastern countries. Since 1990, Bulgaria has accomplished a major shift in trading patterns, with now almost 40% of trade with Western partners. Moreover, since the beginning of 1993, Bulgaria has concluded an Association Agreement with the European Community permitting preferential tariff rates between Bulgaria and the EC. European firms have been very active and successful with major awards in the telecommunications and transport fields. The EC's development program, PHARE, and the British Know-How Fund have wide ranging programs in Bulgaria. Some American firms are utilizing their European based operations in a strategy of entry or have collaborated with European firms. Regarding individual countries, Germany, France, Italy, Greece and Turkey are prominent in business activity. By virtue of proximity, Greece is especially active but more in the small and medium sized trading sector; Turkey is less influential for historical reasons. The other European countries have various advantages based on their respective technological reputations. In sum, foreign competition must be viewed on a case-by-case basis, with no overwhelming advantage to any single country. In the immediate future however, Bulgaria's EC-Association Agreement does call for preferential tariff treatment for products sourced from that region. As regards the disadvantaged position of U.S. products with respect to European competition, the upcoming GATT negotiations with Bulgaria may level out the field.