BETTER REGULATION SERIES Vol. 2

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Report No. 55727-BG

B U L G A R I A

A d m in is t r a t iv e a n d R e g u la t o r y B a r r ie r s t o

B u s in es s

V o l .IIJuly, 2010

THEWORLDBANK

PRIVATEANDFINANCIALSECTORDEVELOPMENTDEPARTMENT

CENTRALEUROPE

AND

THE

BALTIC

COUNTRIES

EUROPEANDCENTRALASIAREGION

WASHINGTON,DC


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2010 The International Bank for Reconstruction and Development / The World Bank

1818 H Street NW

Washington DC 20433

Telephone: 202-473-1000

Internet: www.worldbank.org

All rights reserved

1 2 3 4 13 12 11 10

Manufactured in the Republic of Bulgaria

First printing: November, 2010

Report No. 55727-BG

This volume is a product of the staff of the International Bank for Reconstruction andDevelopment / The World Bank. The findings, interpretations, and conclusions expressed in

this volume do not necessarily reflect the views of the Executive Directors of The World Bankor the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. Theboundaries, colors, denominations, and other information shown on any map in this work donot imply any judgement on the part of The World Bank concerning the legal status of anyterritory or the endorsement or acceptance of such boundaries. In case of any discrepancies, theEnglish language of the report Administrative and Regulatory Barriers to Business willgovern.

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this work without permission may be a violation of applicable law. The International Bank forReconstruction and Development / The World Bank encourages dissemination of its work andwill normally grant permission to reproduce portions of the work promptly.

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Cover design by Boris Balabanov


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CURRENCY AND EQUIVALENT UNITS

(Exchange rate effective July 13, 2010)Currency Unit=Bulgarian Lev (BGN)

EUR 1=1.95583 US $ 1=1.55607 BGN

FISCAL YEAR1 January 31 December

WEIGHTS AND MEASURESMetric System

Vice President: Philippe H. Le Houerou, ECAVPCountry Director: Peter C. Harrold, ECCU5Sector Director: Gerardo Corrochano, ECSPF

Sector Manager: Sophie Sirtaine, ECSPFTask Team Leader: Evgeni Evgeniev, ECSPF


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ABB REVIATIONS AND ACRONYMS

ARC Administrative and Regulatory CostsBEEPS Business Environment and Enterprise Performance Survey

BGN Lev (Bulgarian national currency)BNB Bulgarian National BankCEG Council for Economic GrowthCEO Chief Executive OfficerCOM CommunicationCoM Council of MinistersECSPF Finance and Private Sector Development Department, World BankEPO European Patent OfficeEU European UnionEUR Euro (currency)FDI Foreign Direct Investment

FIAS Foreign Investment Advisory Service joint World Bank andInternational Finance Corporation program

GDP Gross Domestic ProductGNI Gross National IncomeICT Information and Communication TechnologiesIMF International Monetary FundISO International Organization for StandardizationIT Information TechnologyLARACEA Limiting Administrative Regulation and Administrative Control on

Economic Activity (Act) NSI National Statistical Institute

NSSI National Social Security InstituteOECD Organization for Economic Co-operation and DevelopmentR&D Research and DevelopmentRIA Regulatory Impact AssessmentSIGMA Joint initiative by the OECD and the EUSG State GazetteSMEs Small and Medium-sized EnterprisesUSPTO United States Patent and Trademark OfficeVAT Value Added TaxWEF World Economic Forum


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TABLE OF CONTENTS

ACKNOWLEDGEMENTS .................................................................................................... viii

EXECUTIVE SUMMARY ....................................................................................................... ix

I. INTRODUCTION ................................................................................................................... 1

1.1 Background .................................................................................................................... 11.2 Sources of Information and Reports Objectives ........................................................... 31.3 Structure of the Report ................................................................................................... 4

II. OVERALL BURDEN OF REGULATION ......................................................................... 5

2.1 Bulgarias Doing Business Standing .......................................................................... 5

2.2

Findings from Surveys ................................................................................................... 6

III. SPECIFIC AREAS OF ADMINISTRATIVE AND REGULATORY BARRIERS .... 11

3.1 Frequency of Interactions with Regulatory Authorities ............................................... 113.2 Compulsory Certificates, Operating Licenses, and Trading Licenses ......................... 123.3 Inspections ................................................................................................................... 133.4 Barriers to Entry ........................................................................................................... 153.5 State Fees ..................................................................................................................... 173.6 Closing a Business ....................................................................................................... 18

IV. PERCEPTIONS ABOUT REGULATION AND TAXATION ...................................... 20

4.1 Perceptions about Regulation ...................................................................................... 204.2 Perceptions about Taxation .......................................................................................... 22

V. REGULATORY CONSTRAINTS RELATIVE TO OTHER CONSTRAINTS ........... 25

5.1 Problems with Perceptions and Use of Rankings ........................................................ 255.2. Perceptions of Manufacturing Firms ........................................................................... 255.3. Perceptions of IT Firms ............................................................................................... 265.4 Similarity in Perceptions .............................................................................................. 28

5.5

Differences in Perceptions for Different Types of Firms ............................................ 30

5.6 Comparisons with Earlier Surveys ............................................................................... 325.7. The Link to Innovation ................................................................................................ 32

VI. ROLE OF THE BULGARIAN GOVERNMENT AND

BUSINESS ASSOCIATIONS .................................................................................................. 34

6.1 The Role of the Bulgarian Government ....................................................................... 346.2 The Role of Business Associations .............................................................................. 37


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TABLE OF CONTENTS

VII. CONCLUSIONS AND KEY RECOMMENDATIONS ................................................41

7.1

General Findings ........................................................................................................... 417.2 Specific Findings for Manufacturing and IT Firms ...................................................... 42

7.3 Key Recommendations ................................................................................................. 447.3.1 Policy ..................................................................................................................... 447.3.2 Institutional ............................................................................................................457.3.3 Legislative .............................................................................................................45

REFERENCES ..........................................................................................................................47

ANEXES .....................................................................................................................................51

Annex 1. The importance of regulatory reform for economic growth .......................................51

Annex 2. Sources of information ................................................................................................54

Annex 3. Standards and certification in Bulgaria .......................................................................57

Annex 4. Regulatory barriers to investment: survey results .......................................................58

Annex 5. Problems with Perception Data ...................................................................................62

Annex 6. Comparison with the 2008 BEEPS and 2007 Enterprise Survey................................66

Annex 7. Innovation indicators...................................................................................................68


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TABLE OF CONTENTS

Figure 21 Index of unreported economic activity in Bulgaria (2003-2009) 29Figure 22 Percent of companies identifying corruption as the first major

impediment in EU-10 (2008)30

Figure 23 Small firms were more likely to say that tax rates, access to land andfinance, corruption, and informality were serious problems than otherfirms

31

Figure 24 Older manufacturing firms are more likely to belong to businessassociations than new manufacturing firms or IT firms

37

Figure 25 For firms that belonged to business associations, the most commonforms of support were resolving disputes with officials, workers orother firms

39

Box 1 Business Inspections. Issues, Solutions, Implementation and M&E 15Box 2 Focusing on Small Business 32


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Specific Findings

The 2009 ARC Survey provided some other specific findings about regulatory andadministrative burdens in Bulgaria for new manufacturing firms (established after 2006),older manufacturing firms, and IT firms, as follows:

Firms were relatively satisfied with company registration procedures. However,relatively few firms used electronic business registration (although the trend is positive).

Only few firms had complaints about the delivery of service by inspectors, tax

rates or tax administration. Interactions with inspection bodies are frequent, and theinspection cost is high. IT firms reported the highest median cost in dealing withinspections, while new manufacturing firms reported the highest median number ofdays in dealing with inspections. In the area of taxation, the frequency of changes in taxrules and rates and tax penalties were the most common concerns.

The survey also highlighted differences in obstacles for manufacturing and IT

firms. Informality, corruption and access to finance were identified as serious problemsby both manufacturing and IT firms, but IT firms also saw instability, crime, and courts

as serious impediments. Regulation is more burdensome for small firms than for large firms. Managers of

small firms were more likely to say that regulations and taxation were serious problemsthan managers of large firms were. Furthermore, managers of small firms were morelikely to complain about access to finance and access to land than were managers oflarge firms. Finally, small firms did appear to be affected more significantly bycorruption and informality.

Business associations are only partly successful in helping their members with

information on various aspects of government policy. About one-third of firms ineach sector reported that they belonged to a business association. Of these, about halfreported receiving benefits from the association. The most common forms of benefitswere resolving disputes and obtaining information and contacts in domestic markets.There is less evidence that business associations are highly successful with respect to

providing information on regulation or lobbying for better regulation.

Moving Forward

In spring 2010, the Ministry of Economy, Energy and Tourism developed an Action Plan

to reach a 20 percent reduction in administrative burden by 2012. Thus, Governmentauthorities prepared a new Better Regulation Program to cover the period until 2013, whichwas adopted by the Council for Economic Policy in April 2010. While this is a good step

forward, the Government of Bulgaria should sustain its efforts to limit administrative andregulatory barriers to business in line with EU policies. Specific recommendations to theGovernment are presented in the Summary Matrix. In addition, further study is recommendedon: (i) business exit procedures; (ii) the role of competent authorities and mechanisms set up bythe legal framework for protection of competition; and (iii) the relationship between regulatoryconstraints and innovation.


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by 2012 as a response to the Better Regulation Agenda of the European Commission (EC).Few months after the Convergence Program came out, tripartite negotiations amongGovernment, business and labor unions led to the adoption of another Governmental Programof 60 anti-crisis measures, two of which aim at improving the business environment. The firstmeasure is in terms of the adoption of a timetable for the accelerated development of a full-range electronic government to reduce corruption and increase transparency and efficiency of

public expenditures, as well as to reduce fees for services. The second measure targetssimplification of bankruptcy procedures and aims at shortening the delays of bankruptcy

proceedings.

However, achieving pre-crisis growth levels, raising labor productivity and improving the

business environment will require continued reforms to remove administrative and

regulatory barriers to business. Bulgaria has achieved substantial progress in removingobstacles to business regulation. However, there is a great deal of room for improvement,especially to reduce regulatory and administrative costs to business. This would help boosteconomic growth. Indeed, regulatory burden seriously affects productivity, competitiveness,and firm growth and influences foreign direct investment decisions. By contrast, well-designedadministrative procedures can help stimulate business activities, productivity, and firm growth(see Annex 1 for more information on the relationship between economic growth andregulatory reform).

1. 2 S o u r c e s o f I n f o r m a t i o n a n d R e p o r t s O b je ct i v e s

The report uses data from surveys, information from reports of governments and

international institutions, as well as analysis from secondary sources. The report usescomparative data from the World Bank Enterprise Survey and Doing Business Report on EU-10 economies8, Business Environment and Enterprise Performance Survey (BEEPS), Bulgaria2009 Administrative and Regulatory Costs (ARC) Survey, communications and reports from

the EC, Government, OECD and World Bank, as well as secondary literature. More detailedinformation about the sources of information is provided in Annex 2.

The report serves three purposes:

Providing the economic backdrop and comparators of Bulgarias regulatory

environment. The report puts into context and compares with peers Bulgarias progress (orlack of) over time on regulatory measures in a number of primary areas directly affecting the

business environment.

Reporting on survey results including assessments by and perceptions of senior

managers of Bulgarian enterprises. The ARC Survey provides testimony of participating firmson the quality of public services delivery and formal procedures with which businesses must

comply, and that remain as key obstacles to enterprises in the current environment.

Identifying strategic reform recommendations, including regulatory changes,institutional upgrading and capacity building, and legislative changes.

8 The EU-10 economies include Bulgaria, Romania, Lithuania, Latvia, Estonia, Czech Republic, Hungary,Slovenia, Slovakia, and Poland.


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1.3 S t r u c t u r e o f t h e R e p o r t

The structure of the report is as follows. The next Section 2 provides a review of the overall burden of regulation, as per other reports findings, while Section 3 focuses on objectivequestions as per the ARC Survey findings in specific areas of administrative and regulatory

barriers to business. Section 4 builds on ARC Survey findings from perceptions aboutregulation and taxation, whereas Section 5 compares responses on regulatory constraints toresponses about other investment climate constraints based on results of surveys. Resultsacross time are also compared. The link to innovation based on descriptive statistics andeconometric analysis is separately discussed. Section 6 emphasizes the role of the Governmentand the role of business associations in reducing administrative and regulatory burden to

business in Bulgaria. The final Section 7 presents conclusions and provides keyrecommendations in the policy, institutional and legislative areas to reduce administrative andregulatory barriers to business in Bulgaria.


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get a construction permit), Bulgaria has improved in many aspects (see Table 1). For example,reductions in the number of procedures, the time to register, the cost of registration, and theminimum capital requirement have made starting a business considerably easier since 2004.Similarly, the total tax rate and the number of payments have been reduced.

Table1:Althoughimprovementshavenotbeenuniformandsomesetbackshaveoccurred

Bulgaria'sDoingBusinessrankinghasimprovedsince2004Indicators 2004 or earliest

available

2009

Starting a Business Procedures (number) 11 4

Time (days) 32 18

Cost (% of income per capita) 10.4 1.7

Min. capital (% of income per capita) 86.7 20.7

Dealing with ConstructionPermits

Procedures (number) 20 24

Time (days) 127 139

Cost (% of income per capita) 475.2 436.5

Registering Property Procedures (number) 9 8

Time (days) 19 15

Cost (% of property value) 2.4 2.3Getting Credit Strength of legal rights index (0-10) 8 8

Depth of credit information index (0-6) 3 6

Public registry coverage (% of adults) 1.3 34.8

Private bureau coverage (% of adults) 0 6.2

Protecting Investors Extent of disclosure index (0-10) 10 10

Extent of director liability index (0-10) 1 1

Ease of shareholder suits index (0-10) 7 7

Strength of investor protection index (0-10) 6 6

Paying Taxes Payments (number per year) 31 17

Time (hours per year) 616 616

Total tax rate (% profit) 46 31.4

Trading Across Borders Documents to export (number)Time to export (days)

726

523

Cost to export (US$ per container) 1233 1551

Documents to import (number) 10 7

Time to import (days) 25 21

Cost to import (US$ per container) 1201 1666

Enforcing Contracts Procedures (number) 40 39

Time (days) 564 564

Cost (% of claim) 23.8 23.8

Closing a Business Recovery rate (cents on the dollar) 33.8 32.1

Time (years) 3.3 3.3

Cost (% of estate) 9 9Source:DoingBusiness2010(WorldBank,2009c).Since the last Doing Business results, the improvements in the area of regulation have

continued. For example, since the most recent Doing Business 2010, which includesimprovements through June 2009, the new government has reduced minimal paid-in capital forlimited liability companies to EUR 1 from EUR 2,500. This emphasizes the potential forcontinued improvement along a number of dimensions.

2 .2 Fin d i n g s f r o m S u r v e y s

The ARC Survey also provides evidence of reduction in the burden of regulation in recent

years. Rather than relying primarily upon the legal requirements related to specific areas ofregulation, the ARC Survey and the earlier BEEPS and Enterprise Survey collectinformation on firms actual experience with regulations and regulatory authorities.Differences between theDoing Business indicators and survey data can, therefore, be the result


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Figure3:Manufacturingfirmsreportthattheirseniormanagersspendabout5percentoftheirtime

dealingwithregulatoryrequirementsin2009

Source:BulgariaARCSurvey(2009).

Although the burden that regulation imposes on managers has fallen in recent years, a

significant concern is the predictability of how regulations are enforced and interpreted.Many firm managers complained that regulations were applied inconsistently and thatregulatory policy was unstable over half the managers of all types of firms in the ARC

Survey said that regulations were applied inconsistently and unpredictably (see Figure 4).Similarly, the greatest area of concern related to taxation was the frequency of rule and ratechanges.

Figure4:Fewermanagersofmanufacturingfirmssaidthatregulatorypolicieswereinterpreted

inconsistentlyorunpredictablyin2009thansaidthesamein2007

Source:BulgariaARCSurvey(2009),EnterpriseSurvey(2007),BEEPS(2005).


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Overall, regulation in Bulgaria is not as burdensome as it is in many countries in the

world, but Bulgarias ranking in the Doing Business is less favorable than that of many

EU countries. Although there have been some areas in which Bulgarias relative positionshave stayed the same or even gotten worse, Bulgaria has improved in many areas of regulation.For example, reductions in the number of procedures, the time to register, the cost ofregistration, and the minimum capital requirement have made starting a business considerably

easier since 2004. Similarly, the total tax rate and the number of payments have been reducedfor paying taxes. Moreover, survey evidence suggests that the burden of regulation onmanagers in Bulgaria appears to be continually falling in recent years. For example, seniormanagers report spending less time dealing with regulations in 2009, compared to 2008 and2007. However, it is important to emphasize that senior managers of IT firms and newmanufacturing firms report spending more time on dealing with regulations compared to oldmanufacturing firms in 2009. Although the burden that regulation imposed on managers hasfallen in recent years, concerns about the predictability and consistency of regulation remainhigher in Bulgaria compared to the other new EU entrants. Therefore, Bulgaria has achieved

progress over the past few years but there is still room for improvement.

statistically significant after controlling for other things (see Annex 4, Table A). Similarly, the differences inperceptions are also not statistically significant (see Annex 4, Table D).


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SECTION IIISPECIFIC AREAS OF ADMINISTRATIVE AND

REGULATORY BARRIERS

This section will present objective information on specific areas of regulation and

administrative costs for businesses. Using information from the ARC Survey and othersources such as the Doing Business Report, this section will emphasize areas such as thenumber of inspections and information on a number of licenses and compulsory certificates11that firms have applied for in the past couple of years. Some administrative and regulatorycosts for businesses shall be presented as well.

3 .1 Fr e q u e n cy o f I n t e r a c t io n s w it h R e g u la t o r y A u t h o r it ie s

An important question is how often firms apply for licenses and compulsory certificates

and how often they interact with inspection authorities. Among the questions in the ARCSurvey, firms were asked whether they had had to apply for a number of licenses andcompulsory certificates to produce or sell any of its products or services in the past year or pasttwo years.12 Before looking at the time and costs of these interactions, this section will presentinformation on how common these interactions are.

Figure6:ITfirmswerelesslikelytoreportapplyingforlicensesandcompulsorycertificatesthan

manufacturingfirms


Applying for compulsory certificates was more likely than applying for licenses. Firms ofall types were more likely to say that they had had to apply for compulsory certificates than fortrade or operating licenses (see Figure 6). Manufacturing firms were more likely to say thatthey had to do this than IT firms were. Whereas only about 14 percent of IT firms said that

11 IT firms understood under compulsory certificates those certificates they needed to obtain in order to carry out

their activities, whereas according to the understanding of manufacturing firms, compulsory certificates refer tocertificates they needed to obtain for manufacturing of a particular product. IT and manufacturing firms need toobtain compulsory certificates periodically.12 The LARACEA Act (Art. 4, par.1) distinguishes between the following regulatory regimes: licenses foreconomic activity, registration of economic activity, issuance of compulsory certificates or filing a notification toconduct a separate deal or action.


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they had to apply for compulsory certificates, about 27 percent of new manufacturing firms and37 percent of older manufacturing firms said the same.

A significant number of firm managers also said that they had applied for trading licenses

in the past two years. About 24 percent of new manufacturing firms, 15 percent of oldmanufacturing firms and 14 percent of IT firms said that this was the case. Far fewer firmmanagers said that they had applied for an operating license less than one in ten. Very few

old manufacturing firms, in particular, said that they applied for one in the past two years.

Most firms reported that they had been inspected in the past year. Over half of newmanufacturing firms and close to three-quarters of old manufacturing firms said that this wasthe case, compared to about 40 percent of IT firms (see Figure 6). This suggests thatinspections have the potential to be a significant burden on firms because businesses are subjectto numerous inspections due to multiple types of administrative regulations. The highfrequency of inspections is also likely to be a result of lack of good coordination amonginspecting bodies, which produces a burden for the business.

3 .2 Co m p u ls o r y Ce r t if ic a t e s , O p e r a t i n g L ic en s e s , a n d

T r a d i n g L i ce n s e s

Getting compulsory certificates is more costly but takes less time than getting licenses.

Firms that reported getting licenses and compulsory certificates were also asked how muchtime it took them to get them and how much it cost.13 For firms reporting that they had to get a

permit, the median response was that it took about 7 working days to get the document (seeFigure 7). This was slightly shorter than the median responses given by firms that got trade andoperating licenses (10 and 15 days, respectively).14 Although this suggests that the amount ofwork is not overly burdensome, it is important to note that several firms reported far longertimes in excess of one year, for getting general trading licenses and compulsory certificates.

Figure7:

Dealing

with

licenses

and

compulsory

certificates

in

terms

of

time

and

money


Note:Onlyincludesfirmsreportingthattheyreceivedthattypeoflicense.

13

Because only a small number of firms applied for some licenses, it is not possible to divide the sample into newmanufacturing firms, old manufacturing firms and IT firms. As a result, in several sections, unweighted averagesare presented rather than weighted averages. This is because weights were not available for the firms in the ITsector or the new manufacturing firms due to the sampling methodology.14 As noted above, we will use median/average firm to denote the median or average response on these questions.Medians are used because outliers can be a problem in open-ended questions.


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Firms were also asked how much they spent on obtaining licenses and compulsory

certificates. These amounts included all costs including official fees, formal and informal payments, and other associated costs. Although the median response of firms to thesequestions suggested that they spent less time getting compulsory certificates than otherlicenses, the median monetary cost was higher for getting compulsory certificates than foreither of the other two licenses (see Figure 7). Given that more firms reported that they needed

compulsory certificates than operating or general trading licenses, these costs were multipliedfor getting compulsory certificates.

3 . 3 I n s p e c t i o n s

In addition to being asked about licenses and compulsory certificates, firms were also

asked about inspections by a number of public agencies. Because more firms reportinspections than getting licenses, data is presented for different groups of firms separately. Themost common inspections are tax inspections, National Social Security Institute (NSSI)inspections, and, for old manufacturing firms, hygiene inspections. IT firms reported fewerinspections than manufacturing firms did (see Figure 8). The average response for IT firmswas only about 0.5 tax inspections per year and even fewer of other types of inspections. Inthis respect, the burden of inspections is far less for IT firms than for other types of firms. Thisevidence is consistent with the evidence on perceptions that suggests that IT firms are lessconcerned about inspections than manufacturing firms are.

Figure8:ITfirmsreportedfewerinspectionsthanmanufacturingfirms

0,0

0,5

1,0

1,5

2,0

NSSI Police Hygiene Fire Environmental Tax

Num

bero

fInspec

tions

IT New Manufactur ing Old Manufacturing


Note:Oneextremeoutlier,whichreported200taxandNSSIinspections,isexcludedfromtheaverage.

New manufacturing firms also, for the most part, reported fewer inspections than old

manufacturing firms did. The main exceptions to this were tax and environmentalinspections new manufacturing firms reported more of these than other firms did.


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Figure9:Fewfirmshadcomplaintsaboutthedeliveryofservicebyinspectors


Note:Becausetherearefewfirmswithobservationsforeachtypeofinspection,unweightedpooledmeansarepresented.

WeightswerenotavailableforITornewmanufacturingfirms.

Firms were also asked to assess the quality of service provided by inspectors from each

agency. For the most part, firms had few complaints. Between 70 and 85 percent reported thatservice was either good or very good (see Figure 9). The agency that received the lowest ratingwas the NSSI, which about 72 percent of managers said provided good service.

Despite the large number of inspections, the time to deal with inspections is quite low but

the cost of dealing with inspections is high. The median response that firms gave toquestions about the time that they spent dealing with inspections was between 2 and 3 workingdays, and companies did not report spending any money on direct or indirect expenses(bribery tax). The median response to the question on cost to deal with inspections was

between about BGN 1,000 and BGN 2,500. IT firms reported the highest median cost indealing with inspections, while new manufacturing firms reported highest median days indealing with inspections (see Figure 10).

Figure10: Dealingwithcompulsoryinspectionsintermsoftimeandmoney


Note:Onlyincludesfirmsreportinginspections.


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Table2:Timeandcostofstartingabusiness,selectedcountries

Time (days) Cost (% of income per capita)

2008 2009 2008 2009

Bulgaria (Sofia) 49 18 2 1.7

EU Best Practice (Denmark) 6 6 0 0

OECD x 13 x 4.7

Czech Republic 15 15 9.6 9.2Estonia 7 7 1.7 1.7

Hungary 5 4 8.4 8

Latvia 16 16 2.3 2.1

Lithuania 26 26 2.7 2.4

Poland 31 32 18.8 17.9

Romania 10 10 3.6 2.9

Slovakia 16 16 3.3 2

Slovenia 19 6 0.1 0Source:DoingBusiness(WorldBank2008a,2009c).The Government has improved the registration procedures in two ways. One way inwhich the government has improved business registration is by transferring procedures away

from courts to a special Registration Agency. Another way in which the government hasfacilitated business registration is through the introduction of electronic Trade Registry in early2008, and, as we know, introduction of electronic registers for businesses reduces time toregister, requires fewer procedures and costs less (Klapper and Delgado, 2007).

Few firms use electronic registration. Although the electronic registration could potentiallyreduce the time and cost of registration, the potential is not fully exploited by businesses inBulgaria yet. This may be a problem of information. In fact, among firms that registered or re-registered in 2008 and 2009, only about 20 percent used electronic registration procedures (seeFigure 12).

Figure

11:

Firms

that

registered

electronically

were

less

likely

to

say

that

registration

procedures

weretoocostlyortooktoolong

-10%

0%

10%

20%

30%

40%

50%

60%

All Registered electronically Did not register electronically

%o

ffirmssayingprocedurestooktoolongor

weretoocostly

Time should be reduced Cost should be reduced


Note:Becausetherearefewfirmswithobservationsforeachtypeofregistration,unweightedpooledmeansarepresented.

WeightswerenotavailableforITornewmanufacturingfirms. Onlyfirmsthatregisteredorreregisteredin2008or2009are

included.

However, the number of companies registering electronically is increasing. In 2009, close

to one-third of firms that registered or re-registered did so electronically. Not surprisingly,firms that had broadband connections were far more likely to register electronically. About 7percent of firms without broadband connections registered electronically compared to about 23percent of firms with broadband connections.


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Figure12:Fewfirmsuseelectronicregistrationalthoughthenumberisincreasing


Note:Becausetherearefewfirmswithobservationsforeachtypeofregistration,unweightedpooledmeansarepresented.

WeightswerenotavailableforITornewmanufacturingfirms. Onlyfirmsthatregisteredorreregisteredin2008or2009are

included.

Firms that registered electronically were less likely to say that registration costs should be

reduced and that the time for registration should be cut. Only about 38 percent of firmsthat registered electronically said the time should be reduced and only 27 percent said that thecost should be reduced. In comparison, about 55 percent and 50 percent of firms that did notregister electronically said that this was the case. The improved perceptions about cost mightdenote that firms that register electronically are more willing to pay for the improved servicethan firms that register using other methods.

3 .5 S t a t e Fees

Businesses, especially SMEs, have to deal with a state fees regime that can be unfair and

non-transparent. State fees made up BGN 850 million for the state budget in 2008.17 Theincrease of state fees between January 2005 and November 2008 has been substantial 60

percent(without the calculation of the Ministry of Health Tariff, the increase of which has beenthe greatest).18 A recent World Bank report (2009b) noted that one reason for the wilddevelopment of tariffs including state fees was the lack of governmental policy on setting statefees and the outdated legal framework of the state fee regime. Moreover, there is weakinstitutional framework to monitor the setting and approval of state fees by executive agenciesand ministries; wrong incentives are in place there is rather a focus on the revenuegenerating function of fees and fines than on the legal requirements, namely the principle of

cost recovery proclaimed by the EC when it comes to administration fees. An example couldbe given with the tour operator fee that remains ungrounded BGN 5,000 (BGN 1,000 forapplication processing and BGN 4,000 for registration). Additionally, the regulatory regime forindependent restaurants/cafes still exists although it is almost inapplicable worldwide. Neitherthe process to set fees nor to distribute retained fee revenues is transparent agencies are freeto determine on their own and without clear criteria what budget to be put aside for additional

bonuses for staff from those 25 percent, with sometimes even 75 percent of state fees revenuesremaining in the agencies. Australia offers a best practice case in implementing the principle ofcost recovery through a five-phase approach, whereas the State of Hamburg (Germany)

17 Ministry of Finance Report of the Consolidated State Budget, as of 31 December 2008.18 Government draft report (____2009b).


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provides a best practice case of single cost calculation in setting fees that follow European bestpractice.19

3 .6 Clo s i n g a B u s i n e s s

Although the procedures to start a business have been reduced considerably since 2004,

less progress has been made with respect to the procedures to close a business, whichremain time consuming and costly. Closing a business has become more problematicrecently due to the international financial crisis. Bankruptcy proceedings take long inBulgaria to complete and assets depreciate considerably during the process. In fact, no

progress has been made regarding business exit since 2004 it takes 3.3 years to close abusiness and costs 9 percent of estate value with a recovery rate of 32.1 percent (see Table 3).The insolvency procedures are highly burdensome in Bulgaria, and these indicators arelagging far behind the OECD average (1.7 years, cost is 8.4 percent of estate, and 69 percentrecovery rate).

Table3: Timeandcostofclosingabusiness,selectedcountries

Countries Time (years) Cost (% of estate) Recovery rate(Cents on the USD)

2008 2009 2008 2009 2008 2009

Bulgaria (Sofia) 3.3 3.3 9 9 32.1 32.1

EU Best Practice(Finland)

0.9 0.9 4 4 87.3 87.3

OECD 1.7 1.7 8.4 8.4 68.6 68.6

Czech Republic 6.5 6.5 15 15 20.9 20.9

Estonia 3 3 9 9 37.5 37.5

Hungary 2 2 15 15 38.4 38.4

Latvia 3 3 13 13 29 29

Lithuania 1.7 1.5 7 7 48 49.4

Poland 3 3 30 20 29.8 29.8Romania 3.3 3.3 9 11 29.5 28.5

Slovakia 4 4 18 18 45.9 45.9

Slovenia 2 2 8 8 45.5 45.5

Source:Doing Business (World Bank 2008a, 2009c).

In recent years, there has been progress in reforming the bankruptcy and insolvency

procedures in Bulgaria but there is a lot of room for improvement. A step forward inproviding better environment for firms to exit is that power has shifted to creditors and courtproceedings have been simplified in recent years bankruptcy cases are heard by the DistrictCourt and the Court of Appeal, rather than in three instances as it used to be. Yet the court

procedure on exit of firms needs to be speeded up. Furthermore, steps have been already

undertaken to speed up liquidation of businesses through amendment of the CommercialRegister Law (Transitional and Final Provisions 4. (1)) if a company does not re-registerwith the Commercial Register by end-December 2010, it should be declared in liquidation.However, there is no specific timeframe identified for the liquidation process. A step forwardwas also the new package of 60 anti-crisis measures of the Bulgarian Government, which camethrough in March 2010 as a result of negotiations with the business and the labor unions,

provisioning one measure aiming at simplifying the procedures and reducing the time spent forinsolvency cases. However, implementation results in the area of bankruptcy and insolvency

procedures to reduce time and cost of closing a business are yet to be seen.

19 For more information about the case of Australia and the case of the State of Hamburg, see World Bank(2009b).


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Overall, this section presented the frequency of interactions for getting licenses,

compulsory certificates or interactions with inspection bodies and also looked at starting

and closing a business, and at the state fees regime. It concluded that firms apply forcompulsory certificates more often than for operating or trade licenses. Getting compulsorycertificates was also more costly compared to getting licenses, but it took less time. Surveyanalysis found that interactions with inspection bodies (e.g. tax, National Social Security

Institute, hygiene inspections) were frequent. It was suggested that that businesses are subjectto numerous inspections due to multiple types of administrative regulations. Firms did notcomplain about the quality of service of inspection bodies, and the time for dealing withinspections was quite low. However, the cost of being inspected was found to be high. Forinstance, IT firms reported highest median cost in dealing with inspections, while newmanufacturing firms reported highest median number of days in dealing with inspections. Thesection also concluded that Bulgaria had reduced the barriers to starting a business considerablyover the past five years. For instance, business registration procedures were transferred awayfrom courts to a special Registration Agency, whereas electronic Trade Registry was installed acouple of years ago. In addition, the new measures for reducing paid-in minimum capital fromEUR 2,500 to EUR 1 for registration of limited liability companies meet business needs. The

ARC survey found that few firms used electronic registration, although the number ofcompanies registering electronically was increasing. With respect to closing a business, it wasfound that in recent years, there has been progress in reforming the bankruptcy and insolvency

procedures. A new governmental measure, aiming to simplify the procedures and reduce thetime spent for insolvency cases, is provisioned as well in a program of 60-anti crisis measures,adopted in March 2010. However, implementation results to reduce time and cost of closing a

business are yet to be seen. This section also emphasized the state fees regime which continuesto be burdensome for the business due to outdated legal framework, weak institutional structureand lack of government policy for setting state fees.


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SECTION IVPERCEPTIONS AB OUT REGULATION AND TAXATION

This section will complement the earlier discussion of objective questions on regulation

with an elaboration of perception-based firm-level data on the burden of regulation and

taxation. The 2009 ARC Survey also contains several additional questions on the way in whichfirms perceive the burden of regulation and taxation. In the area of regulation, firms were askedwhether competition protection law, instability of regulatory policy, inconsistent application ofregulation, standards and certification, compulsory certificates, environmental regulation, andinspections were serious problems. In the area of taxation, firms were asked about frequencyof tax law changes, tax penalties, appeal mechanisms, tax audits, their treatment by the taxauthorities, availability of information, tax inspections, and tax forms.

Perception-based data may have some drawbacks, but it provides complementary

information for the analysis. Although, as discussed in detail below, perception-based datahas some drawbacks, these questions include information on some areas that are not includedamong the objective questions (i.e., perceptions about competition protection law) and someareas for which it is difficult to design purely objective questions (e.g., instability of regulatory

policy). Even in areas that overlap with the objective data, the perception-based data canprovide complementary information that confirms the previous analysis. Because weights canbe constructed for the manufacturing firms in the sample, the initial analysis will focus on theseenterprises. Later parts of the analysis will look at perceptions of IT firms and newmanufacturing firms.

4 . 1 P er c e p t io n s a b o u t R e g u la t i o n

The areas of regulation that manufacturing firms were most likely to say were serious

problems were competition protection law, compulsory certificates, standards and

certification, and instability of regulatory policy. Between 14 and 26 percent ofmanufacturing firms said that these were serious problems (see Figure 13). The ARC Surveydoes not provide much additional data on two of these areas competition protection law andstandards and certification. This suggests that additional information on these areas would beuseful. A previous World Bank report, the 2008 Investment Climate Assessment, addressed theissue of standards and certification in detail (see Annex 3). Concern about the instability ofregulatory policy was consistent with the previous analysis that suggested that many firms

believed that regulations were enforced inconsistently and unpredictably. As noted above,although firms reported fewer concerns about this in the 2009 ARC Survey than in the earlier2007 Enterprise Survey, they remained more concerned than their counterparts in many of theother new EU entrants from Central and Eastern Europe.


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Figure13:Intheareasofregulation,themostseriousconcernsformanufacturingfirmsare

competitionprotectionlaw,compulsorycertificates,standardsandcertification,andthestabilityof

policybytheauthorities


Managers of IT firms reported very different constraints with respect to regulation

compared to managers of manufacturing firms. By far, the biggest constraints were relatedto the stability of regulatory policy and the consistent application of regulations (see Figure 14).Managers of IT firms were more likely to say that these constituted a serious problem thanmanagers of manufacturing firms were.

Figure14:ITfirmshaddifferentperceptionsabouttheinvestmentclimatethanmanufacturingfirms


In contrast, managers of IT firms were generally less likely to say that other areas of

regulation were serious problems. With the exception of competition protection law, fewerthan 5 percent of IT managers said that any of the specific areas of regulation represented

serious problems. Although about 12 percent said that competition protection law was aserious problem, this remained lower than for manufacturing firms. As discussed later, manyof these differences are statistically significant even after controlling for other factors.


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Relatively few manufacturing firms complained about most of these areas related to

taxation. With two exceptions, fewer than 13 percent of firms complained about any of theseareas of taxation (see Figure 15). The main exceptions are frequency of changes in rulesand rates and tax penalties. About 23 percent of manufacturing firms said that these wereserious problems.

Figure15:Fewmanufacturingfirmscomplainedaboutanyareaoftaxation


As for managers of manufacturing firms, the largest concern of managers of IT firms was

the frequency of changes of tax rates and rules. Although it remained as the greatestconcern for managers of IT firms, far fewer managers said it was a serious problem only 8

percent compared to 23 percent of managers of manufacturing firms. (see Figure 16)

The second and third greatest concerns for managers of IT firms were the appeal

mechanism and tax penalties, whereas for managers of manufacturing firms those were

the third and second greatest concerns. As with the frequency of rate and law changes,however, far fewer IT managers said that these were serious problems. Less than five percentof IT managers said that any other area related to taxation was a serious problem.

There are limited differences in perceptions about taxation between IT firms and

manufacturing firms. As noted above, there are only limited differences between IT firmsand manufacturing firms. IT firms were less likely to say that the appeals mechanism was aserious problem although it remained among their top concerns in the area of taxation. Theywere also more likely to say that tax audits were a serious problem although it did not rankamong the top concerns either.


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Figure16:VeryfewmanagersofITfirmscomplainedaboutanyareaoftaxation


There is a difference in perceptions about taxation between small and large firms. For themost part, small firms were more likely to say that most areas of taxation were a serious

problem that large firms were. Several of these differences are statistically significant. Forexample, they were more likely to say that their treatment by the tax authorities was a problemand were more likely to say that the appeals mechanism was a serious problem. Furthermore,they were more likely to say that tax rates were a serious problem. Despite the difference,

however, only 8 percent of small firms said it was a serious problem meaning that tax rateswere not among the top concerns even of managers of small firms.

Overall, this section about perceptions of regulation and taxation can be summarized as

follows. Although relatively few firms complained about tax rates or tax administration, therewere more complaints about several specific areas related to taxation and regulation. Specificareas of regulation that firms complained about included competition protection law, standardsand certification, the instability of regulation, and the frequency of changes to the tax system.Despite these concerns, it is important to note that perceptions about regulation and taxationhave improved in recent years. Fewer firms said that tax rates and tax administration wereserious problems in 2009 than in 2007. Moreover, fewer firms said that regulations wereapplied inconsistently or unpredictably.


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SECTIONVREGULATORY CONSTRAINTS RELATIVE TO OTHER

CONSTRAINTSThis section compares survey responses to questions on regulatory constraints to

responses to questions about other investment climate constraints. The section focuses onthose investment climate constraints that are asked about on the BEEPS, Enterprise and ARCSurveys. This includes some constraints related to regulation and taxation although not allof the constraints that are asked about in the previous section. This makes it possible tocompare results across time. The section also links findings on innovation.

5 .1 P r o b le m s w i t h P er c e p t io n s a n d U s e o f R a n k i n g s

There are problems using perception-based data, but it makes sense to take concerns ofenterprise managers seriously. Since enterprise managers know more about the immediate

problems their businesses face than do government officials, academic researchers or otheroutside experts, it makes sense to take their concerns about the investment climate seriously.There are some questions about perception-based data that need to be further clarified, such as:(i) whether firm managers can provide consistent and reliable information about the constraintsthey face; (ii) whether the perceptions of the enterprise managers interviewed in the surveyreflect what the biggest constraints in the country really are; and (iii) whether perception-baseddata provides reliable information on constraints that allows researchers to make cross-countryand cross-time comparisons.21 (see Annex 5 for more discussion).

This report uses ratings, not rankings. The reason for using only data on ratings in the reportis because the ARC Survey did not collect any information on rankings (i.e., what firms saw asthe biggest problem that they faced) and therefore this information was not available.22 Cross-time comparisons will, therefore, be based upon ratings, not rankings.

5 .2 . P er c e p t io n s o f M a n u f a c t u r i n g Fi r m s

This section will focus on the 17 obstacles that are asked about in the standard enterprise

survey. Because these were asked about in the earlier 2007 Enterprise Survey and the 2008-2009 BEEPS, it is possible to compare results from the 2009 ARC Survey with the results fromthe earlier surveys for these measures. The previous section focused on several areas ofregulation and taxation that were not asked about in the two earlier surveys. Before looking atthe IT and new manufacturing samples, it is interesting to look at the broader sample ofmanufacturing firms.23

21 Although the concerns about using perception-based data are serious, it is important not to overemphasize theseproblems. Recent work suggests that perception-based measures line up reasonably well with objective macro-and micro-economic indicators even on a cross-country basis (See, for example, Gelb, Alan, et al. (2006);Hellman, Joel, et al. (1999); and Hallward-Driemeier, Mary, and Reyes Alterido (2009)). That is, despite concernsabout subjective measures, they seem to provide useful information.

22Rankings are based upon questions that ask enterprise managers what the top constraints they face are. Forexample, in the Enterprise Surveys, firms are asked to rank the top three constraints that they face. Constraints canthen be ranked based upon the percent of firms that said that each was the biggest constraint they face. Ratings, incontrast, are based upon questions that ask enterprise managers to rate each constraint on a fixed scale.

23 The reason for this is that the weights that can be constructed for these firms make it possible to constructmeasures that should be representative of the entire population of manufacturing firms.


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The areas that manufacturing firms were most likely to say were serious problems were

informality, corruption, and access to finance. Close to 40 percent of manufacturing firmssaid that informality was a serious problem and close to 34 percent said that corruption was aserious problem (see Figure 17). Slightly fewer firms said access to finance was a serious

problem about 30 percent of firms.

Figure17: Practicesofinformalfirms,corruption,andaccesstofinancearetheareasofthe

investmentclimate

that

Bulgarian

managers

of

manufacturing

firms

were

most

likely

to

say

were

seriousconcerns


Few firms said most of the individual areas of regulation that reflected the earlier BEEPS

and Enterprise Surveys were serious problems. Only about 12 percent of firms said thatbusiness registration and licensing was a serious problem, only about 2 percent said that laborregulation was a serious problem, and nearly none said that trade regulation was a serious

problem.

5 .3 . Percep t i ons o f IT Fi rm s

IT firms have some different views about the investment climate in comparison with

manufacturing firms. IT firms appear, at least at first glance, to have similar views about theinvestment climate to those of manufacturing firms. IT firms were most likely to say thatinstability, corruption, crime, informality, courts, and access to finance were serious problems(see Figure 18).

There were, however, in some cases significant differences in the percent of firms that

said different areas were serious problems. In particular, IT firms were far less likely to saythat informality (21 percentage points difference), access to finance (19 percentage pointsdifference), tax rates (12 percentage points), and courts (12 percentage points) were major

problems. They were also far more likely to say that instability (25 percentage points

difference) and crime (10 percentage points) were major problems. The other differences weresmaller.


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Figure18:ITfirmshaddifferentperceptionsabouttheinvestmentclimatecomparedto

manufacturingfirms


Most of the areas that ranked among the top concerns of IT managers were also among

the top concerns of manufacturing managers. Despite the sometimes large differences in the percent of firms that said particular areas were major problems, and although the order wassomewhat different compared to manufacturing, most of the areas that ranked among the topconcerns of IT managers ranked among the top constraints for managers of manufacturing

firms as well. In particular, instability ranked as the sixth greatest constraint amongmanufacturing firms, corruption ranked as the second largest constraint, informality ranked asthe top constraint, courts ranked as the fourth largest constraint, and access to finance ranked asthe third greatest constraint. The one exception was crime that was ranked as the ninth greatestconstraint for manufacturing firms but as the third greatest constraint for IT firms. Anothersimilarity was that relatively few IT firms rated tax administration or the specific areas ofregulation (e.g., labor regulation, business licensing, or trade regulation) as serious problems.

Despite the differences, it is important to note that many of these differences are not

statistically significant. It is difficult to assess how important these differences are that is,they could be due to sampling variation. The one exception is crime the difference is large,

it makes a large difference in relative rankings, and the difference is statistically significant (seebelow).

The objective data is consistent with the perception based data. IT firms were more likelyto report losses due to crime and were more likely to say that they spent money on security (seeFigure 19). To the extent that they are more likely to sustain losses and more likely to investin prevention it is not surprising that they are more concerned about crime. This couldreflect that IT firms have capital (i.e., computers) that can be stolen easily and that can be soldeasily afterwards.


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Figure19:ITfirmshavegreaterlossesduetocrime


5 .4 S i m i la r i t y i n P er c e p t io n s

Although, as noted above, most of the specific areas of regulation that were asked about

in the broad Enterprise Surveys were not considered problems, this does not imply that

regulation is not a serious concern in Bulgaria. One piece of evidence from the ARC Survey

that suggests that red tape and burdensome regulation may remain an obstacle to firmoperations in Bulgaria is that corruption and informality remain serious concerns for enterprisesin Bulgaria. About 40 percent of firm managers said that informality was a serious problemand close to 34 percent said that corruption was a serious problem. Many studies have foundthat both are linked to burdensome regulation, red tape, and taxation.24

Although as discussed above, cross-country comparisons of perceptions are difficult to

make, it is important to note that both corruption and informality are hard to measure in

a consistent and objective way across countries. In particular, lying and non-responses meanthat even objective questions on corruption and informality should be treated cautiously.25 Forthis reason, this sub-section will make some cross-country comparisons using perception-based

data from the 2008-09 BEEPS. This survey is used for Bulgaria, rather than the ARC Survey, because the BEEPS had identical coverage in terms of sectors across countries and werecompleted at similar times. This makes comparisons using the BEEPS data for Bulgaria easierthan using the BEEPS for the other countries, and the ARC Survey for Bulgaria.

The percentage of firms in Bulgaria identifying unfair competition practices from

informal business was higher compared to other new EU member states. More firms inBulgaria said it was a problem than in any other country except Lithuania. (see Figure 20)

24 See Friedman and others (2000), Djankov and others (2002a), Djankov (2002b), Johnson and others (1998),Schneider and Enste (2000), Schneider and Klinglmair (2004), Shleifer and Vishny (1993), Svensson (2005) andWorld Bank (2003).25 See, for example, Azfar and Murrell (2009) for a discussion of problems with objective measures of corruptionand the problems associated with lying.


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Figure20:In2008,veryhighpercentageofcompaniesinBulgariaidentifyunfaircompetition

practicesfrominformalbusinessasmajorimpediment

Source:BEEPS

(2008

09)

Another evidence suggests that informality is a serious concern in Bulgaria. Renooy andothers (2004) and World Bank (2007) estimate that undeclared work in Bulgaria is between 22-30 percent of GDP. This is higher than in many of the other new EU entrants, like the CzechRepublic (9-10 percent), Poland (14 percent), and Estonia (8-9 percent). With the exceptionsof Greece (20+ percent) and Italy (17 percent), the informal economy is usually between 1-7

percent in most of the core EU countries.

Other recent studies also support the finding that the hidden economy in Bulgaria is

relatively high. A local think tank has estimated an annual index of unreported economicactivity in Bulgaria since 2003. Based upon two criteria, employment and turnover, they find

that Bulgaria has high levels of hidden economic activity (see Figure 21).

Figure21:IndexofunreportedeconomicactivityinBulgaria(20032009)

Source:HiddenEconomySurveyonPopulation2009.VitoshaResearch,CenterfortheStudyofDemocracy.Note:Thisstudyinvolvesasurveywhichtriestocapturethedynamicsofthethreeindices.Hiddenemploymentindexisrelatedtoperception

baseddata,whereasHiddenTurnoverandHiddenEconomicActivityIndicesarebasedonobjectivedata.

As with informality, Bulgaria also compares poorly with the best performing countries interms of perceptions about corruption. Although fewer firms said corruption was a serious

problem than in Romania, Lithuania and Latvia, more firms in Bulgaria said it was a problemthan in the best-performing new EU entrants from Central and Eastern Europe (see Figure 22).


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Figure22: PercentofcompaniesidentifyingcorruptionasthefirstmajorimpedimentinEU10(2008)

Source:BEEPS(200809).

5 .5 D i ff e rences i n Percep t i ons f o r D i ff e ren t Ty pes o f Fi rm s

In addition to the differences between IT firms and manufacturing firms, there were also

some other differences in perceptions between firms of different types. As discussed in theprevious subsection on perceptions about regulation and in the Annex, it is important to keep inmind that some observed differences can be due to sampling variation or omission of otherfactors that might affect perceptions. To avoid this problem, major results from statisticallysignificant differences from the regression analysis shown in Annex 4 are presented below.

IT Firms. Managers of IT firms were more likely to say that several areas of the investment

climate were serious problems than managers of manufacturing firms were. In particular, theywere more likely to say that transportation, trade regulations, and crime were serious problemsthan managers of other firms were. As noted earlier, however, although the differences fortransportation and trade regulation are statistically significant, these differences are mostly notlarge in absolute terms. The one exception to this rule is crime, which ranks as the third biggestconstraint for IT firms. As noted above, the objective data also suggests that IT firms arevulnerable to crime.

New Manufacturing Firms. Managers of new manufacturing firms were less likely to saythat several areas of the investment climate were serious problems than other managers were.In particular, they were less likely to say that tax rates, courts and crime were serious problems.

Firm Size. Large and small firms had different views about the investment climate for severalof its important areas. For the areas unrelated to regulation and taxation, large firms were lesslikely to say that access to land and access to finance were serious problems than other firmswere. This is not surprising, especially for access to finance. In most countries of the world,large firms find it easier to gain access to finance than small firms do. Several cross-countrystudies have found results that are consistent with these results for Bulgaria (Gelb and others,2006; Hallward-Driemeier and Alterido, 2009). These results suggest Bulgaria is no exceptionin this regard.

Another difference is that large firms were more likely to say that transportation was a

serious problem. Again this is not surprising and is consistent with previous studies (Gelb

and others, 2006; Hallward-Driemeier and Alterido, 2009). Large firms are more likely to sellin national and international markets as opposed to just local markets than small firmsare, making them more vulnerable to problems in the transportation sector.


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Box2:FocusingonSmallBusiness

Source:OECD(2010).

5 .6 Co m p a r i s o n s w it h E a r lie r S u r v e y s

Although it is difficult to make cross-time comparisons of perceptions, it is interesting to

see how perceptions have changed since the earlier 2008 BEEPS and the 2007 Enterprise

Survey. The BEEPS provides some information on how perceptions changed as the worldwidefinancial crisis deepened, while the comparisons with the 2007 Enterprise Survey makes it

possible to assess how the economy has changed since the pre-crisis time (World Bank, 2008b).

As discussed below, because these surveys had slightly different coverage than the 2009 ARCSurvey, these comparisons must be made carefully.

Informality and corruption ranked among the top three constraints in the 2008 and the

2009 surveys. There are several similarities with the results from the 2008 BEEPS (see Annex6, Figure A). Most notably, corruption and informality ranked among the top three constraintsin both the 2008 and 2009 surveys based upon the percent of firms that said each was a serious

problem. Concern about informality was slightly more pronounced in the 2009 survey, butotherwise the differences were small.

The concerns of managers in the 2007 Enterprise Survey were similar to results from the

2008 BEEPS and 2009 ARC Surveys in some ways. In particular, based upon the percent of

firms that said each area was a serious problem, informality and corruption also ranked amongthe top constraints in the 2007 Enterprise Survey (see Annex 6, Figure B).26 Similar number offirms said informality was a serious constraint in 2009 (about 40 percent) and significantlyfewer firms said that corruption was a serious problem in 2009 (34 percent compared to 46

percent). The lower level of concern about corruption in 2009 is encouraging.

5 .7. T h e L i n k t o I n n o v a t i o n

The econometric analysis of the 2009 ARC Survey does not reveal statistically significant

relationships between innovation indicators and regulatory indicators, but it is useful to

study this linkage further. Although the econometric analysis of the 2009 ARC Survey does

26 See World Bank (2008b) for more details on the 2007 survey. Although the sample was slightly different in the2007 surveycovering retail trade and services in addition to IT and manufacturing, manufacturing firms hadsimilar views about corruption and informality as retail trade and service firms.


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not find any statistically significant relationship between innovation indicators and regulatoryindicators, it is still useful to study further this linkage.27 Recovery from the downturn would

be supported by a friendly business environment and incentive mechanisms advancinginnovation and technology absorption. A step forward in this direction is the new package of60 anti-crisis measures of the Bulgarian Government, adopted in March 2010. One of thesemeasures prescribes changes in the Regulation to the Investment Encouragement Act to provide

more incentives to firms that invest in high-tech, R&D, education, health, and IT, amongothers. Another initiative of the Government is the cooperation with the World Bank throughAnalytical and Advisory work on Enhancing Bulgarias Competitiveness through Innovationthat has been initiated in April 2010.

Overall, this section compared survey responses to questions on regulatory constraints to

responses to questions about other investment climate constraints. An attempt to link

regulation to innovation indicators was also made. This section used perception-based data,explaining the limitations but also emphasizing that it makes sense to take concerns of firmmanagers seriously. Cross-time comparisons were presented, using the 2009 ARC Survey,2008 BEEPS and the 2007 Enterprise Survey, based upon ratings, not rankings. The areas that

manufacturing firms were most likely to say were serious problems were informality,corruption, and access to finance, as per the ARC Survey findings. Earlier surveys also foundvery high percentage of companies identifying unfair competition practices from informal

business and corruption as major impediments. IT firms have quite different views about theinvestment climate from those of manufacturing firms. IT firms were most likely to say thatinstability, corruption, crime, informality, courts, and access to finance were serious problems.IT firms were also more likely to report losses due to crime and were more likely to say thatthey spend money on security. As far as the link to innovation is concerned, statisticallysignificant relationships between regulatory constraints and innovation indicators were notfound. However, it was suggested to study this linkage further.

27 Annex 7 presents descriptive statistics and econometric results connecting firms innovation propensity tocharacteristics of firms such as size and location, based on the 2009 ARC Survey.


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SECTIONVIROLE OF THE BULGAR IAN GOVERNMENT AND BUSINESS

ASSOCIATIONS

As discussed earlier, the burden of regulation appears to have fallen in recent years, but

progress remains to be achieved. Several objective measures of regulation based upon theDoing Business Report and the 2009 ARC Survey, 2008 BEEPS and 2007 Enterprise Survey suggest that this is the case. This section will look at the role of the Government and business associations in Bulgaria in reducing the regulatory and administrative barriers tobusiness.

6 . 1 T h e R o le o f t h e B u lg a r i a n G o v e r n m e n t

In line with EU priorities, Bulgaria has put regulatory reform very high on its political

agenda. The improvement of the regulatory environment and regulatory processes and thesimplification of administrative barriers to business at the level of the EU Institutions and at thelevel of the EU Member States are key factors in the Lisbon Strategy for Growth andEmployment and its relaunch at the European Council in March 2005. The EU recognized thatthe creation of regulatory regimes that support the business environment was essential forcontinued productivity, growth and development. One of the means to facilitate this growthand development is the creation and implementation of an explicit Better Regulation Policy,which includes reduction of the administrative burden for business.

Better Regulation Policy does not mean more regulation or less regulation but involves theputting in place of processes which ensure that good quality policy making takes place and that all

regulations drafted are easy to understand, apply, comply with and are, therefore, of high quality.OECD (2008)

The progress that the government has achieved towards Better Regulation in Bulgaria in

recent years has been supported by international partners. The European Commission,28the Organization for Economic Co-operation and Development (OECD)29, and the World Banksupported the Government in the past few years to improve the business environment. Some ofthe major steps the country has achieved towards improving the business environment were:

The work of the Interministerial Working Group for the Optimization of Regulatory

Regimes. The group reviewed 360 regulatory regimes, eliminating 71 regimes andamending 121 others;30

The enactment of the LARACEA Act in late 2003 (State Gazette (SG) No.55 fromJune 17, 2003);31

The development of eight Measures for Implementing Better Regulation Principles(August 2006);

32

28 The EC conducted bi-annual monitoring of the Better Regulation Policy in Bulgaria. The BulgarianAdministration benefited from grant funding at the amount of EUR 1.25 million for Better Regulation initiativesthrough the Administrative Capacity Operational Program. The activities included development of reports,

methodological manuals, trainings, among other, for the period between January and June 2009.29 SIGMA analyzed Regulatory Management Capacity of the Bulgarian Government in 2007-2008, whereas in2008-2009, OECD conducted a research on the Investment Reform Index in Bulgaria.30 This work was based on CoM Decision No. 393 of 2002.31 The World Banks Programmatic Adjustment Loan (2004) provisioned the adoption of the LARACEA Act asone of the conditions for the loans approval.


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Despite the difficulties with public spending, the new Government has programmed

budgetary and other measures to continue administrative reform efforts. Between 2006and 2009, the Government of Bulgaria spent EUR 10.6 million on strengthening of theadministrative capacity in key areas, such as state management, including regulatory authoritiesand the judicial system. In 2010, in spite of cutbacks in public spending, the Government is

planning to spend another EUR 11.3 million (0.03 percent of GDP) on Administrative Reform

(as per the Convergence Program 2009-2012). A recent review for the Ministry of Economy,Energy and Tourism identified 398 (by December 2007) notification obligations stipulated in33 national laws and the corresponding secondary legislation. The administrative costs relatedto them amount to EUR 81 million, and the administrative burden to EUR 51.5 million. Thereport recommended an elimination of 136 obligations, estimated to alleviate the administrative

burden for businesses with around EUR 13 million. This has been emphasized in theConvergence Program 2009-2012 with a view to reform the regime of notification obligations.Furthermore, the Government re-confirmed recently the commitment to reduce administrative

burden for businesses by 20 percent by 2012.39 The Government estimates that the reduction ofadministrative burden for businesses in Bulgaria by 20 percent would result in an increase inGDP by 0.72 percent by 2025.40

Although a political will is demonstrated, there is a need that the government devote more

attention to reducing the administrative burden. A recent report by Open Europe (2009)41estimated that the cumulative cost of regulation introduced in 1998-2008 (2008 prices) inBulgaria was EUR 4.3 billion (58 percent attributed to EU legislation vis-a-vis nationallegislation),42 whereas the annual cost for 2008 of regulation in Bulgaria was estimated at EUR867 million (50 percent attributed to EU legislation) or around 2.6 percent of the GDP in 2008.In April 2010, the Government authorities planned 136 measures to further reduce theadministrative burden, which will get closer to the 20 percent reduction target by 2012.However, progress in this area is yet to be seen.

To improve the business environment, the new Government needs to amend the

LARACEA Act to improve conditions for business. Business in Bulgaria continues to beoverloaded by non-compliance with the provisions of the law, regarding enforcement ofregulatory regimes. The LARACEA Act is the common law on regulatory regimes. Theadoption of this law in 2003 is widely considered by policymakers as a huge step forward, butthe law does not function well.

A step forward in this direction is the cooperation of the Ministry of Economy, Energy

and Tourism with the World Bank in preparing an Ex-post Impact Assessment of the

LARACEA Act. The World Bank (2010a) report summarized that the Act was intended toreform the regulatory environment by providing incentives for the business in simplifyingadministrative regimes and administrative control. However, the implementation of the Law

still continues to function poorly, despite its 16 amendments there are still too manyirregular regulatory regimes, primarily introduced by municipalities in order to collect fees,issuing superfluous regulations that burden the business in terms of cost and time. Moreover, anumber of important objectives, specified in the LARACEA Act have not been achieved, suchas: increasing transparency during the implementation of regulatory regimes; decreasingopportunities for corruption by limiting the discretionary authority of the administration;

39 Convergence Program 2009-2012, Document of the Government of Bulgaria.40 As per Governments Convergence Program 2009-2012.41 The report builds on a UK case to estimate the impact of regulation on businesses, involving analysis of over2000 regulatory impact assessments. Most of the regulatory cost relates to the private sector only, not to the

economy as a whole. The measurement includes primarily the policy costs and administrative burdens involved incomplying with regulations. In a few cases, direct financial costs were also included, as fees paid directly to theGovernment. EU/national legislation impact on regulatory cost is estimated.42 Calculated on the basis of Open Europes Regulation database, World Banks Doing Business rankings, DGEnterprise; Kox, Henk (2005) and Eurostat data. An extrapolation on EU-27, based on the United Kingdomestimates has been done.


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ensuring publicity of the activities of administrative authorities in their application of statutoryinstruments relating to regulation and control; optimization of inter-institutional coordination;and optimization of the coordination between the different departments. The forthcomingWorld Bank Assessment also specifies that the Act has a limited scope since most regulation of

business remains beyond the scope of the Act and is covered by the Administrative ProceduresCode and other special laws. There is also limited application of the principle of silent

consent. Although Art. 28 of the Act provides that this principle relates to the issue ofcompulsory certificates and certificates for individual deals or actions, research indicates, ingeneral, that special laws avoid the application of the principle of silent consent. In fact,only six laws apply this principle. Furthermore, no ex-ante impact assessment is made duringthe drafting and submitting of new regulatory regimes, although this is required by the Act.Finally, there is no adequate institutional framework for the Act that would oversee itsimplementation. As a result of the assessment, the World Bank report puts forwardrecommendations, covering instrumentalities and institutional and economic aspects that mayimprove the functioning of the Act, thus improving the regulatory environment affecting all

businesses.

6 . 2 T h e R o l e o f B u s in e s s A s s o c ia t i o n s

Firms were also asked whether they belonged to business associations. Oldermanufacturing firms were the most likely to say that they belonged to business associations.About 36 percent of managers of old manufacturing firms said that they belonged to a businessor sectoral association compared to only about 32 percent of IT firms and 29 percent of newmanufacturing firms (see Figure 24).

Figure24:Oldermanufacturingfirmsaremorelikelytobelongtobusinessassociationsthannew

manufacturingfirmsorITfirms


One reason for this pattern is that older firms appear to be more likely to belong to

business associations than younger firms do. Close to two-thirds of IT firms that werebusiness association members were over 10 years old compared to only one-third of IT firms

that were not business association members (see Table 4). Similarly, 97 percent of oldermanufacturing firms that belonged to business associations were over 10 years old compared toonly 69 percent of manufacturing firms that were not members. Another reason for that might

be that business associations in Bulgaria have limits as to how they can organize their work andwhat kind of functions for support to their members they can have. Although the lack of a


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Business Assiciation Act makes business associations underfunded, functionally weak, andrather scattered, they have nevertheless mushroomed in the past two decades.

There were several noticeable differences between members and non-members of

business associations. The 2009 ARC Survey shows that non-members tend to be smallerthan members (see Table 4). For manufacturing firms, the average non-member had only 7workers compared to 15 workers for members. Similar patterns hold for younger

manufacturing firms and IT firms. Members were also more likely to be involved in exporting,more likely to be limited liability companies, more likely to have broadband internet access,and more likely to be involved in Research and Development (R&D). For new firms and ITfirms, they were also more likely to license foreign technologies, more likely to haveinternational certification (e.g., ISO 9001), and were more likely to have introduced new

products. Overall, this suggests that members appear to be larger and more sophisticated thannon-members as per a number of dimensions.

Table4:Characteristicsofmembersandnonmembers

Manufacturing New Manufacturing IT

Members Non-

members

Members Non-

members

Members Non-members

Number of Workers 15 7 33 10 17 7

Over 10 years old 97% 69% 0% 0% 66% 36%

Exports 7% 3% 26% 6% 26% 3%

Limited Liability 22% 20% 79% 56% 88% 79%

Sole Proprietorship 78% 80% 21% 41% 12% 19%

Has Broadband Internet 62% 49% 86% 71% 100% 97%

Licenses foreign

technologies

2% 8% 18% 7% 37% 10%

ISO or other certification 9% 19% 30% 9% 43% 13%

Sofia 4% 22% 4% 9% 43% 30%

Plovdiv 4% 17% 39% 47% 31% 30%

Varna 28% 24% 14% 17% 14% 22%

Bourgas 64% 37% 43% 27% 11% 18%

New Products 45% 46% 68% 35% 80% 63%

Any R&D expenditure 20% 2% 21% 3% 34% 14%

Time dealing with

regulation

6 4 11 10 10 11

Regulation isunpredictable

68% 64% 56% 56% 66% 61%

Source:AuthorsestimatesbasedontheARCSurvey(2009).

Business associations are partly successful in helping their members. Although not theprimary purpose of business associations, business associations can potentially help memberswith information on various aspects of government policy. In this capacity, they could provideinformation on government regulations and how to deal with them. The evidence from the2009 ARC Survey suggests that they are only partly successful in this respect. In particular,firms that belonged to business associations were generally no more likely to say thatregulation was predictable or to spend significantly less time dealing with regulation (see Table

4). For example, manufacturing firms that belonged to business associations were more likelyto say that regulation was unpredictable than firms that were not (68 percent compared to 64percent) and reported spending more time on average dealing with government regulations (6percent compared to 4 percent).


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progress in improving the b