Interview with Vladimir Penkov for the Newspaper CASH, June 2006

The State has monopolised the EU finds

What the private sector needs is a specialized commercial court


An interview with Albena Stoeva


Q.: Mr Penkov, which are the worst problems that have been ‘pending’ for years facing the private sector months before our accession to the EU?

A.: At first, Bulgaria seemed to be making very good progress in terms of the investment climate: in the free movement of goods and capital, in achieving a liberal currency regime, in enabling investors to repatriate their profits, in harmonizing the customs system and the establishment of a favourable taxation regime. All this has resulted in a good statutory framework for investments, which was the prerequisite for attracting foreign investors. It would be good if all such issues could be resolved in a similar manner. The government claims that it is reducing the number and scope of licensing regimes, thus cutting red tape. True, some are being abolished, but others pop up in their place. In some municipalities the sheer number of licensing regimes is in the hundreds, which places an especially heavy burden on small and medium-sized businesses while also limiting their ability for partnership with transnational companies.

Q.: What solution do you propose?

A.: Regrettably, the proposal of the Bulgarian Chamber for Commerce and Industry, to adopt the principle of tacit consent in place of tacit refusal, has been turned down. The rejection of that proposal is detrimental to business. Currently, the public administration is not in any way liable for delays in granting licenses and authorizations. Thus, for example, an applicant is required to submit scores of documents and planning permits, no matter if they contemplate to build a hut or a skyscraper. The public administration is not concerned in any way, not least because it assumes no responsibility and can afford to be clueless, whereas it is expected to show some conscience and be supportive of business. In a situation where tacit consent is all it takes, the public administration will be motivated to perform its duties conscientiously, to assume responsibility and protect the interests of individuals and businesses. Of course, this would require the relevant regulatory framework.

Q.: On what grounds was the principle of tacit consent, as proposed by you, rejected?

A.: Maybe out of fear that issues would be resolved too quickly if that principle were to be applied. Thus, there would be no leeway for corruption. There were also concerns that, out of sheer neglect, a decision could be made to the detriment of the State. Another motive was the insufficient capacity and competence of the public administration. Those businesses in Bulgaria that are conscientious taxpayers are blackmailed by the government administration, as yet another proof that we are still a long way from being a civil society. The government administration fails to support in a comprehensive manner the business community and individual citizens. Another problem with the public administration is its inability to exercise robust control. The State does not care that non-governmental organizations such as BCCI or the Bulgarian Industrial Association could be its partners. The State has monopolised the various EU funds, which breeds a considerable risk of Bulgaria failing, through sheer lack of administrative capacity and favourable conditions, to absorb that financial resource to any meaningful extent. Because in the absence of suitable projects that would convince the EC that its funds will be invested to a good purpose, in high-quality projects, we don’t have much of a chance. During the first year after our accession to the EU, we will hardly be able to absorb more than 600 million EUR. Such unpreparedness will impact foreign investors and their Bulgarian subcontractors, which will be rendered unable to benefit from such projects.

Q.: If our public administration is ill prepared to implement projects, how would you evaluate the preparedness of the private sector?

A.: Part of the business community is bracing itself. My impressions are that the major enterprises in the meat packing and dairy sectors are long ready. Smaller companies in different sectors are considerably worse off in that respect. Yet, provided they receive loans at favourable terms, they will likewise manage to adapt and be competitive in the marketplace.

Q.: Bulgaria scares off potential investors also with the possibility of corrupt practices sneaking into their dealings with the administration…

A.: This is the third major problem for the business community: the fight against corruption, which is already acquiring the dimensions of a psycho thriller. This breeds mistrust in the institutions, because of the unpredictability of public tenders. There is not a shred of transparency in bidding procedures. Information is in short supply or comes too late in the process, making it impossible for bidders to prepare themselves. Participants in bidding procedures do not receive equal treatment, which makes it possible to eliminate some ‘unsuitable’ companies. Vaguely formulated terms in the tender documentation make bidding even more burdensome.

A fourth problem is crime. In the economy, crime amounts mostly to syphoning off VAT and importing goods without paying customs duty, which prevents Bulgarian industries from achieving competitiveness.

Another aspect of that is the low closure rate of criminal offenses, compounded by allegations of police brutality and arbitrariness. There is hardly a household in this country that has not become victim to a house robbery, or to a crime against the individual. The State and its institutions are there to keep crime in check by enforcing public order. The individuals and businesses that work in the interest of society and pay, through their taxes, the salaries of the police force, expect in return security, cooperation and support, and not, by any means, police brutality and arrogance.

Q.: What gaps in the legislation would you identify as burdensome to business?

A.: One example is the Concessions Act. In its previous version, it allowed, in exceptional circumstances, the award of a concession contract without tender or any other competitive procedure. Perhaps during the term in office of the Kostov government (1997-2001), there was some justification for this legal loophole. But the EU has every right to insist that a tender be held every single time. In my opinion, all it would take is to drop paragraph 3B of the Transitional and Final Provisions, referred to hereinabove, and make some amendments within the framework of the old Act, which otherwise is quite modern and serves its purpose well.

The currently proposed new bill, by contrast, even creates the impression that it contravenes the Constitution. There is a mix-up between public procurement and concession. This law is even worse than the previous one and is badly in need of change. In its present form, it sets out vague and stretchy criteria that breed insecurity among foreign investors. As a matter of principle, unclear language and the continual changes in the legislation make investors afraid they could overlook some detail, or end up in contravention of a new provision or formality that would expose them to sanctions.

Another problem is the Commercial Register.

Q.: BCCI has made a significant step in this direction by laying the foundations of the e-register…

A.: The State has likewise made a step in the right direction by establishing the Central Registry Agency. But are the conditions already right for swiftly issuing an e-document or e-signature, or for expeditiously receiving a document in a foreign language?

Another hurdle to business is the inadequate conduct of the State with respect to the refund of VAT: if someone down the line has cheated, why make businesses acting in good faith suffer by denying them their due refund? And, as if that were not enough, currently another, even more absurd principle is under discussion: the introduction of shared liability for the correct taxpayer. A business that has paid up its VAT has no knowledge of the process or the preceding players down the line. It is under no obligation to know who they are, nor does it have any leverage over them. Whereas the State, which has at its disposal the entire set of tools: internal revenue and customs authorities, economic police and the prosecution office, has abdicates from its functions, thereby placing a financial burden on the conscientious taxpayer, who has no capacity to exert pressure on the defaulting ones. This is both a theoretical and a practical legal absurdity.

The lax time limits for VAT refund, over 15 days, place a great burden on businesses while allowing the government to operate for too long with other people’s money. Such money belongs to the businesses; it is for investment, payroll, technology transfer. The government uses such money inefficiently, it can never be a good steward, as it has proven time and again. Although it blocks the movement of funds, the VAT account would be justified if that money was refunded on time. 

In this context, here is yet another absurdity: Bulgarian companies participating in projects under international funding are not exempted from VAT, while foreign companies are. If a foreign company hires a Bulgarian subcontractor, such an entity would not be competitive vis-a-vis a foreign one. The state should have an interest in changing that situation.

Q.: How would you comment on the presence of the ‘gray sector’?

A.: The shadow economy accounts for about 55 to 60 per cent of the entire business sector. Such companies may become transparent, a desirable partner for Western investors. But the State should do what it takes: reduce corporate tax to 10, or – why not – 8 per cent? More items of expenditure should be recognized as corporate costs, and some preferences should be provided for small businesses.

The big problem for investors is the judicial system, specifically the resolution of commercial disputes related to specific or major contracts. What we need is a specialized commercial court to ease the burden on civil courts. Equal criteria and equal, time-bound practices, all in the same place, should result in predictable and proper court decisions. In this case, the business community demands clear and accurate rules, and due and fair process.

I salute the introduction of private enforcement, yet I believe that the concurrent existence of two systems – state and private enforcers, each subject to different rules of organization, responsibilities, etc. – could not be effective. No solution has yet been found to the backlog of about 380,000 blocked cases initiated by the state enforcement system. Apart from that, the single public register, personal responsibility, the common accounting rules – all of these things support private enforcement in establishing itself as a reliable and transparent institution.