Two decisions of the Bulgarian authorities in July dealt a serious blow on country's frail investment environment.
First, the parliament approved the so-called Domuschiev amendment that cuts down obligations under privatization contracts concluded in the past. The amendment would have saved local businessman Kiril Domuschiev a fine of over 50 million levs, and would have benefited media mogul Delyan Peevski's business as well. Second, the Commission for Protection of Competition (CPC) blocked the sale of the local assets of Czech energy group CEZ, the biggest energy business in Bulgaria, and of Nova TV, the most influential TV station, with hazy motives that seem to serve political interests.
After a wave of public indignation and president Rumen Radev's veto, the Domuschiev-Peevski amendment was reconsidered. GERB, the leading party in the governing coalition that helped the amendment pass initially, demonstrated a sudden turn of mind and voted it down. However, a clear message has been sent: everything is permitted to those close to the ruling elite, and no one can run a large-scale business without the approval of prime minister Boyko Borissov.
The consequences for the business environment are devastating. Foreign investors do not exactly queue to come to Bulgaria, yet the decisions of CPC and the parliament tend to alienate even those few who might have been considering the step. They are now aware of two things:
In order to step in, they would first have to kiss the prime minister's hand and make certain commitments.
Even if they somehow make it in, they would never get out. And even if they do get out, they would have to pay for political backing. The owners of Nova TV and CEZ, both seeing the price of their assets in Bulgaria decline rapidly, can testify to that.
Their worst fears
The two decisions came just a month after the end of six-month Bulgarian presidency of the Council of the EU during which the government tiptoed round any controversial issues and a week after Sofia officially launched the procedure of entering the EU's banking union set as a pre-condition for the country joining the Eurozone. They both justified the worst fears of Brussels and Frankfurt.
In the case of Bulgaria's Eurozone candidacy, the main concern of the European Commission and the European Central Bank is what they euphemistically call "institutional quality", namely the capacity of the country's institutions to work for the public benefit. In July, the parliament and CPC quite plainly demonstrated that they are as corrupt/captured by special interests as the Bulgarian National Bank had been during the collapse of Corporate Commercial Bank in 2014.
The National Assembly readily voted the Domuschiev amendment into the privatization law, even though it unabashedly endorses private interest. Had the amendment stayed, Mr. Domuschiev would have saved over 50 million levs he is to pay as fine for his failure to deliver on commitments related to the privatization of maritime shipping company Navibulgar in 2008, whilst the state finances would have been at a loss. If it hadn't been for the protest of vice-prime minister Valeri Simeonov, leader of NFSB party, the amendment would have passed unnoticed - something that had probably happened in other less notorious cases.
After the scandal broke out president Rumen Radev vetoed the amendment and Mr. Borissov ordered GERB's parliamentary group to comply with the president's decision. As if nothing has happened, the prime minister explained the sudden change of mind with the desire not to leave any doubt about high-level lobbyism.
The president was the only institution to take a reasonable course of action and Mr. Radev's veto allowed GERB to cancel the scandalous amendment. Though this is something of a consolation, it is hardly enough. Rumen Radev is a political amateur - something that carries both advantages and disadvantages. The good thing is that it helps him dissociate from the oligarchy, the bad thing is that only the most scandalous cases arousing wide publicity can reach him. Besides, his limited executive power under the constitution allows him to intervene only where laws approved by the parliament are concerned, i. e. he has no control over distribution of public resources through state-run tenders and investments. A fine example is the CPC barring the CEZ and Nova TV deals. The consequences of its decisions are a way direr than those prompted by the change to the privatization law, yet the CPC rulings seem to have remained completely outside the range of Mr. Radev's radar.
The pathetic regulator
For the first time in its recent history CPC has blocked a business acquisition citing concerns over concentration as its motive. The competition watchdog has the right to do so, of course, the issue is one of motivation.
Both decisions, on CEZ and Nova TV, are not legally sound as there are no real proofs of the hazard of the proposed acquisition of the companies by the new owners. The buyer of CEZ's Bulgarian assets is Inercom, a small energy company even by Bulgarian standards. The merger of their activities would barely change CEZ market share in electricity trade. In the case of Nova TV, which MTG Group is selling to a fund owned by Czech billionaire Petr Kellner, CPC says Kellner's considerable financial and business assets would have inevitably lead to higher market concentration. By the same absurd logic CPC could bar any foreign investor from coming to Bulgaria.
In addition, no prior in-depth investigation was conducted (in the case of Nova TV it had been launched but was never finished) and the final conclusions are ridiculously short. This is in conflict with the practices of both the Bulgarian competition regulator and the European Commission which publish hundreds of pages to motivate their decisions.
For example, the anti-monopoly regulator saw no problems when tobacco company Bulgartabac Holding connected to Mr. Peevski sold its brands to global cigarette producer British American Tobacco (BAT). As a result of the deal BAT's market share in Bulgaria exceeded 40%, but CPC didn't object, neither had it objected previously to the sales of power supply and television companies in spite of their almost monopoly status. Therefore, one can infer that the regulator's decisions on the proposed sales of CEZ assets and Nova TV are based on the opinion of politicians and their avatars - the CPC members, whether they find the buyers agreeable, rather than on estimates of assets and market share.
Three high ranking GERB officials whom Capital contacted refused to comment on record on the decisions of CPC regarding the deals for Nova TV and CEZ assets. Informally, they shared their concern about both deals. In the case of CEZ their main concern was that Inercom, a small Bulgarian company with no experience in running complex energy structures would acquire an asset of critical importance for national security. Some members of the ruling elite had similar concerns about the sale of Nova TV, namely that Mr. Kellner's contacts with Russia and China may give a foreign country control of one of the private national TV stations. If their misgivings are justified, the transactions should indeed be handled with caution. However, CPC is not a national security agency and the damage its decisions incurred upon the business climate and Bulgaria's appeal to foreign investors are likely to exceed the potential risks involved.
The blocking of CEZ and Nova TV transactions by CPC has turned Bulgaria into a place most hostile to foreign investors. The message is rather clear: it is impossible to run a business in Bulgaria without the approval of the political establishment.
The two cases would make every prospective foreign investor reconsider plans to enter the country since the state might not like its new partner or the new owner of a business. Those already here should feel concerned, too, even more so if they plan to expand their businesses to a considerable market share without getting close to powerful politicians first.
By barring the sale of Nova TV the government has demonstrated its reluctance to let in an investor that may prove immune to political pressure. It was not only the CPC blocking the deal between the current owner of Nova TV, Swedish MTG, and the PPF investment fund of Petr Kellner. When it became clear that the television would be sold, Nova TV almost lost its biggest advertising client, the National Lottery company - a rather lucid message to the prospective buyer.
The CPC rulings are just another demonstration of deteriorating investment climate in Bulgaria. The toxic media environment and the ever changing regulations in the energy sector are chasing off current investors and deter the arrival of new ones. This is evidenced by the fact that no US or West European buyer has shown any interest in Nova TV and CEZ assets in Bulgaria. Only local players with sound political connections have turned up, and they can obviously manipulate CPC at their will.
Some scandals have positive results - they bring a problem to the fore and help find a solution. This is not the case with the Domuschiev amendment and the CPC rulings on CEZ and Nova TV.
With the exception of NFSB party led by Mr. Simeonov, no political group in parliament stood firm and vocal in fighting blatant lobbying. Though opposition Bulgarian Socialist Party voted against the Domuschiev amendment, no Socialist politician dared to take part in the discussions. The same is true for CPC. The overall impression is that Bulgarian politicians see no problem in the competition authority compromising itself. It also means that the problem is highly unlikely to be solved soon. The lack of strong political reaction comes to confirm what the Bulgarian political establishment is saying: "That's us and it's up to us to push a deal," demonstrating its commitment to foul play.
Companies increasingly look at digital solutions and automation
What was the major event in the field of your business sector in Bulgaria in the last quarter and why?During the last several months we took part in many interesting events in the area of e-mobility, energy distributed system, buildings, but also had some more technical events on our own. For example, we hosted guests from all over the world, during the last day of the 2018 PAC World conference that took place in Sofia at the end of June 2018. For the first time, Members of the PAC World community, professionals from utilities and universities, manufacturers and consultants visited ABB's monitoring center in Sofia, from where we operate remotely four photovoltaic parks with a total capacity of 85 MW.
What do you expect in the next major development in the field of your company's business in Bulgarian and why?
The business environment in Bulgaria is very dynamic, and I see positive business opportunities in multiple directions. I can highlight the EV Charging infrastructure where ABB is leading the market, and also the increasing trend in the inquiries from industrial companies who want to automate production and become more digital. The buildings segment is also expanding quite rapidly and looking at solutions for smart homes and industrial buildings.
Marcel van der Hoek is Country Managing Director (CMD) of ABB Bulgaria, since January 2018. He joined the company in 1994, and during the years he takes various managerial positions around the world, including Bulgaria between 2005 and 2011, when he's in charge for the Petrich Production unit and the Low Voltage business in the country. ABB has four production units in Bulgaria, service station for turbochargers and over 2700 employees in Bulgaria.