VIII. TRADE AND PROJECT FINANCING A. The Bulgarian Banking System The Bulgarian banking system has been in a state of flux due to the proliferation of banks following the changeover to a market system. Many of these banks were undercapitalized and poorly organized. A consolidation of Bulgaria's state commercial banks is underway but despite such efforts, most of these banks have significant financial problems with non-performing loans made to state enterprises. The Government plans to assist the sector through an exchange of non-performing loans for Government bonds and thereby restore banks to more viable positions. Banking will remain a source of frustration for Western companies who expect a higher level of service and responsiveness in financial transactions. Some banks require up to 20 days for international transfers to clear; tellers sometimes even inquire as to the purpose of a bank withdrawal. The banking situation will improve when Western banks begin to establish themselves in Bulgaria now that a resolution to debt negotiations - "London Club", has been reached. The second stimulus will result from a successful implementation of state bank privatizations. Investors interested in establishing a bank in Bulgaria must capitalize at a minimum of 500 million leva (about $10 million), and at 200 million leva (about $4 million). Foreign banks are required to place a minimum $500,000 to open a branch bank in Bulgaria. The International Bank for Investments and Development is the only fully functioning U.S. connected bank in Bulgaria - a product of a joint-venture with the Bulgarian Chamber of Commerce. American Express has a representative office in Sofia only. Several new private banks have opened business in Bulgaria. Three foreign banks from the Netherlands, Austria, and Greece have opened branches. Applications by a number of others to open branches should be approved by December 1994. It is not yet clear to what extent foreign banks will be allowed to purchase equity in currently state-owned banks. B. Foreign Exchange Controls Affecting Trading There are no restrictions on the transfer of investment-related funds nor has there been any difficulties in obtaining foreign exchange as remittances. Bulgarian corporations must however provide documentation when transferring funds overseas such as invoices, certificates, transport documents to the transferring bank. In the U.S.-Bulgarian Bilateral Investment Treaty, Bulgaria pledges to permit free and prompt transfers including returns, compensations, payments, capital gains, and contributions to capital maintenance or development of an investment. Regarding exchange rates, in February 1991 a new exchange rate system was introduced that established a floating rate against convertible currencies. The Bulgarian National Bank sets an indicative daily U.S. dollar rate but commercial banks trade on an interbank market thereby setting an "Internal Convertibility" level. Companies may freely buy foreign exchange for imports from the interbank market. Bulgarian citizens and foreigners may also open foreign currency accounts with commercial banks. C. Availability of General Financing Traditional trade financing is handled by several banks, but primarily by the Bulgarian Foreign Trade Bank. The standard array of financial services such as letters of credit, documentary collections, payment transfers, and some credit information is available. In addition, banks may also be involved in countertrade and clearing account arrangements. Most exports are handled on a short-term basis, with a sight L/C with payment terms between 45 and 90 days, though some banks may offer up to 6 months. D. How to Finance Exports/Methods of Payment Due to inflationary pressures, Bulgarian clients wishing to obtain credits for trade financing are faced with interest rates between 72% and 78% (as of mid-1994) and, frequently, security requirements such as securement based on assignment of proceeds, with collateral of up to 125% of the loan. Foreign currency financing is primarily on a short-to-medium term basis, using the London InterBank Market plus substantial margins. State clients, however, face additional difficulties in borrowing as they may not take a mortgage or security interest on state-owned property assets. Moreover, guarantees through government agencies are not available. In the private sector, problems may arise with newly established companies which lack credit histories and are therefore unable to obtain financing. As a result, many importers resort to self-financing means. In sum, trade financing options for Bulgarian importers are few indeed -- there is no Bulgarian import/export credit agency and bank loans are expensive and difficult to obtain. Much agricultural land cannot be bought and sold or used as collateral because no clear title of ownership has yet been determined. The majority of agricultural and agro-business assets designated for conversion to private ownership are debt- ridden and not viable economic enterprises. In general, financing the importation of goods in Bulgaria falls on more creative means such as exporter credits or buyer payment plans. Bulgarian entrepreneurs have been amazingly imaginative in financing imports, utilizing either personal resources, relatives' savings, or leveraging other assets. Nonetheless, financing trade is a major structural weakness in the U.S.- Bulgarian trade relationship. E. Types of Available Export Financing and Insurance EximBank is the primary, if not the sole, source for U.S. export financing and insurance for transaction with Bulgaria. As of August 1, 1994, EximBank opened a new line of medium term lending and guarantees to support U.S. exports to Bulgaria. Prior EximBank policies required a Bulgarian sovereign guarantee to back any EximBank commitments. Under the new policies, higher exposure fees will be set but lending will be available for qualified U.S. exporters. F. Project Financing Available International financial institutions (IMF, World Bank, & EBRD) have contributed nearly $700 million to Bulgaria since 1990. Nearly two-thirds of all infrastructure assistance (those related to investments, technical assistance, sectoral assistance mainly in transport, communications, energy, and the environment, and for the production sectors) was provided by the three main IFIs. The remainder comes from bilateral official aid or other official and private funding, such as PHARE, AID, British Know-How Fund. Much of the major project funding is done in co-financing agreements as has occurred for the energy, transit roads, and telecommunications projects. The European Bank for Reconstruction and Development (EBRD) has been a major player in Bulgaria. The following represents the scope of the Bank's activities for the past two years: 1. Loans/Equity Investment Projects in Bulgaria - Completion of the Construction of the Maritza Power Plant - Digitalization of the Telecommunications Network - Completion of the TransEuropean Motorway - Installation of 15 earth stations/part of the Eurovision net - Capital investment in an investment banking institution - Creation of a dairy plant making yoghurt - Est. of a wholesale market network - Est. a venture capital fund for small/medium enterprises - Support for railway modernization - Increase in the heating efficiency of Sofia district heating - Est. a private sector insurance co. for non-life services - Assist a Bulgarian-Greek j-v to product plastic products 2. Proposed Loans/Equity Investment Projects in Bulgaria - Final assembly and manufacture of auto components - Investment in a recently privatized maize factory - Pilot privatization of Bulgaria's national airline - Expansion of dairy products; food processing networks 3. Technical Assistance and Training Programs in Bulgaria - Port of Varna Masterplan Study - Railway Restructuring Study - Trans-European Motorway Pre-Investment Study - Bulgarian Investment Bank TC - Maritza East II Power Project TC - Sofia Public Transport Study - Sofia Water and Sanitation TC - United Bulgarian Bank TC - Turnaround Management Program The World Bank (IBRD) is involved in some of the above listed projects while funding others separately. Examples of IBRD funding are: - Structural Adjustment Loans for strengthening the private sector - Health Sector Reconstruction: Critical Care and Health Reforms - Employment and Cash Benefits: efficient usage of labor - Water and sewerage operational efficiencies - General educational assistance: assessment & reform - Financial and Enterprise Sector Adjustment - Agricultural development: technical assistance - Global Environment Facility - Conversion of Ozone depleting facilities The European Investment Bank (EIB) also coordinates closely with the above IFIs and has supported the Bulgarian National Bank for small and medium-sized enterprise financing as well as providing funds for air traffic control systems in Bulgaria. IFI objectives for the future appear to be the continuation of infrastructure projects already started, particularly in the fields of energy, telecommunications, road/railway construction and rehabilitation and on private sector/enterprise development. G. The below listing is of major sources for financial assistance for investment, joint-ventures, and other investment- related projects: 1) The U.S.-Bulgarian Enterprise Fund: A $55 million bilateral assistance fund to promote the development of the Bulgarian private sector and to promote joint ventures between small and medium-size Bulgarian firms and Western firms. The fund is designed to provide loans, grants, equity investments, feasibility studies, and technical assistance. Contact point: Frank Bauer, President, 333 West Wacker Dr., Suite 2080, Chicago, Illinois (312) 629-2500; L. Searl Vetter, managing director - Bulgaria, 3 Shipka St., Sofia 1504, Bulgaria, (359) (2) 44 18 62. 2) The U.S. Trade and Development Agency (TDA): TDA is an independent U.S. Government agency which promotes U.S. exports for major development projects. TDA funds feasibility studies, consultancies, training programs, and other project planning services related to U.S. exports. Contracts funded by TDA grants must be awarded to U.S. companies. U.S. involvement in project planning helps position potential U.S. suppliers of goods and services for follow-on contracts when these projects are implemented. TDA has been active in Bulgaria with projects in energy, environment, transport, air traffic control, and telecommunications. Contact point: Goeff Jackson/Scott Contino, SA-16, Rm. 309, Wash. D.C. 20523-1602, (703) 875-4357. 3) The Overseas Private Investment Corporation (OPIC): OPIC is a self-sustaining U.S. Government agency which promotes growth in developing countries by encouraging U.S. private investment. OPIC's key programs are its loan guarantees, direct loans, and political risk insurance. For the Eastern European countries, OPIC offers an Eastern European Growth Fund designed to match with contributing venture capital; the Small Business Loan Guaranty Program; and an Environmental Investment Fund. Contact: OPIC 1615 M Street, NW, Wash.D.C., 20527 (202) 457-7183. 4) The World Bank (IBRD) and the International Finance Corporation (IFC) offer a wide range of support from technical assistance to major project financing. Specific projects are noted above. World Bank, 1818 H St., N.W., Room D-13004, Washington, D.C. 20433, Tel.: (202) 458-0118, fax: (202) 477- 2967. Fax Line for World Bank Business Affairs Advisor: (202) 676-0578. 5) The Multilateral Investment Guarantee Agency (MIGA): MIGA is part of the World Bank Group. Its purpose is to encourage foreign investment in developing countries by providing investment guarantees against the risk of currency transfer, expropriation, war, civil disturbance and breach of contract by the host government. It also provides advisory services to developing member countries in order to improve their attractiveness to foreign investment. MIGA, 1818 H St. N.W. Washington, D.C. 20433; Tel. (202) 473-6168; fax: (202) 477-9886. 6) The European Bank for Reconstruction and Development (EBRD): is capitalized at over $12 billion with the mandate to support private sector development and infrastructure development in Eastern Europe. Contact point: Tom Kelsey, Procurement Liaison Officer, 122 Leadenhall St., London, EC3V 4QL, (071) 338 6000; or in Washington, D.C., Office of Multilateral Development Banks, Room H-1107, U.S. Department of Commerce, Washington, D.C., 20230, tel: (202) 377-3399, fax: (202) 482-0927. 7) European Economic Community (EC) Funding is provided under the "PHARE" Program which provides financial and technical assistance in key sectors of the beneficiary governments' efforts to restructure their economies toward a market-oriented system, and contribute to creating the administrative, regulatory, financial and commercial environment. Contact point: Amb. Thomas O'Sullivan, PHARE, 55 Christo Botev Blvd., Sofia 1000, Bulgaria, (359) (2) 87 24 55/ 88 51 98. H. List of Banks with Full License for Activity in Bulgaria and their Primary Corresponding U.S. Bank; (Code: S=State; P=Private; CB=Corresponding U.S. Bank) Balkan Bank (S) 18 Vitosha Blvd., Sofia Chairman Mr. Ivan Mironov 80-22-33 Vice-Chairman Ms. Nadezhda Apostolova 80-05-40 CB= Bankers Trust, New York Bank for Agricultural Credit (P) 55, Khristo Botev Blvd., Sofia Chairman Mr. Planem Tilev 51-06-87 First Vice-Chairman Mr. Janko Janev 51-89-56 CB= American Express Bank, N.Y. Credit Lyonnais, New York Biochim (S) 1, Ivan Vazov Str., Sofia Manager Mr. Boris Mitev 54-46-04 Vice-Manager Ms. Anna Subeva CB= American Express Bank, New York Bulgarian Foreign Trade Bank (S) 7, Sveta Nedelia Sq., Sofia Executive Directors Mr. Chavdar K. Kunchev 88-17-03, 84-91 Mr. Dimitur N. Atanasov 88-17-03, 84-91 CB= Credit Lyonnais, New York Bulgarian Post Bank (S) 1, Bulgaria Square, Sofia Executive Directors Mr. Vladimir Vladimirov 65-67-80 Mr. Milcho Gurov 65-91-06 Ms. Vania Vasileva 65-92-14 CB= American Express Bank, New York Express Bank (S) 6, Shipka Str., Varna Chairman, Mr. Ivan Konstantinov (052) 23-18-64 Vice-Chairman, Ms. Maria Dobreva (052) 24-50-79 Chief Accountant, Ms. Rositsa Kamburova (052) 24-51-87 CB= American Express Bank, New York First East International Bank (P) 15, Lege Str., Sofia Executive Directors Mr. Goran Goranov 87-31-22 Mr. Stanislav Derlipansky 54-24-81 CB= Bankers' Trust, New York Swiss Bank Corp., New York First Private Bank (P) 2A, Suborna Str., Sofia Executive Directors Mr. Ventsislav Josifov 65-93-88 Mr. Michael Stefanov 65-93-88 Mr. Milian Krumov Dimitrov 65-71-10 CB= American Express Bank, New York Hebros Bank (S) 37 Vazrazdhane, Plovdiv Chairman, Juli Popov (032) 23-18-76 Executive Director, Alexander Grozdanov (032) 22-88-70 Executive Director, Stoyan Markov CB= American Express Bank, New York Credit Lyonnais, New York International Bank for Investment and Development (P) 10, Graf Ignatiev Str., Sofia Executive Vice-President, Mr. Lew Staples 66-59-24 Managing Director, Mr. Bozhidar Bozhinov 88-34-82 CB= Schroeder Bank, New York Mineral Bank (S) 17, Lege Str., Sofia Executive Directors Mr. Vladimir Tashkov 80-20-80 Mr. Asen Zapranov 80-20-70 Mr. Rumen Kasabov 80-27-27 CB= American Express Bank, N.Y. Sofia Bank (S) 25, Janko Sukozov Blvd., Sofia Executive Directors Ms. Maria Koteva 44-18-18 Ms. Zhivko Stoimenov 44-18-15 Mr. Katya Ivanova 44-18-18 CB= Bankers' Trust Swiss Bank Corp., New York Banco Commercial Italiana, New York Stopanska Banka (Economic Bank) (S) 8, Slavianska Str., Sofia Executive Directors Mr. Tsvetan Petkov 80-35-24 Mr. Alexandur Novakov 88-53-06 Mr. Radko Radovsky 52-20-39 CB= American Express Bank, New York United Bulgarian Bank (S) 70, Maria Luiza Blvd., Sofia Executive Directors Mr. Dimitur Dimitrov 31-92-90 Mr. Oleg Nedialkov 31-81-20 CB= American Express Bank, New York CitiBank, New York