BmER REGULATION Vol. IISERIES

Bulgaria

ADMINISTRATIVE AND REGULATORY BARRIERS TO BUSINESS

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WB370910Typewritten Text55727

Report No. 55727-BG

BULGARIA

IAcilninistranve and Regulatory Barriers tf) BusiltCSS

Vol.II !m.t'lllj

THE WORLD BANK PRIVATE AND FINANCIAL SECTOR DEVELOPMENT DEPARTMENT CENTRAL EUROPE AND THE BALTIC COUNTRIES EUROPE AND CENTRAL ASIA REGION WASHINGTON, DC

© 2010 The International Bank for Reconstruction and Development I The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org

All rights reserved

123413121110

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 and Development / 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 Bank or the governments they represent.

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i\ND I~QUIVi\LE~T UNITS.

(Exchange rate effective July 13, 20 I 0)

Currency Unit=Bulgarian Lev (BGN)

EUR 1=1.95583 US $ 1=1.55607 BGN

FISCAL YEAR

1 January - 31 December

WEIGHTS AND MEASURES Metric System

Vice President: Philippe H. Le Houerou, ECA VP Country Director: Peter C. Harrold, ECCU5 Sector Director: Gerardo Corrochano, ECSPF Sector Manager: Sophie Sirtaine, ECSPF Task Team Leader: Evgeni Evgeniev, ECSPF

ABBREVIATIONS AND ACRON\

ARC BEEPS BGN BNB CEG CEO COM CoM ECSPF EPO EU EUR FDI FIAS

GDP GNI ICT IMF ISO IT LARACEA

NSI NSSI OECD R&D RIA SIGMA SG SMEs USPTO VAT WEF

Administrative and Regulatory Costs Business Environment and Enterprise Performance Survey Lev (Bulgarian national currency) Bulgarian National Bank Council for Economic Growth ChiefExecutive Officer Communication Council of Ministers Finance and Private Sector Development Department, World Bank European Patent Office European Union Euro (currency) Foreign Direct Investment Foreign Investment Advisory Service - joint World Bank and International Finance Corporation program Gross Domestic Product Gross National Income Information and Communication Technologies International Monetary Fund International Organization for Standardization Information Technology Limiting Administrative Regulation and Administrative Control on Economic Activity (Act) National Statistical Institute National Social Security Institute Organization for Economic Co-operation and Development Research and Development Regulatory Impact Assessment Joint initiative by the OECD and the EU State Gazette Small and Medium-sized Enterprises United States Patent and Trademark Office Value Added Tax World Economic Forum

'rENTS

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

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

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

1.1 Background .................................................................................................................... 1

1.2 Sources oflnfonnation and Report's Objectives ........................................................... 3

1.3 Structure of the Report ................................................................................................... 4

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

2.1 Bulgaria's "Doing Business" Standing .......................................................................... 5

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

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

3.1 Frequency ofInteractions with Regulatory Authorities ............................................... 11

3.2 Compulsory Certificates, Operating Licenses, and Trading Licenses ......................... 12

3.3 Inspections ................................................................................................................... 13

3.4 Barriers to Entry ........................................................................................................... 15

3.5 State Fees ..................................................................................................................... 17

3.6 Closing a Business ....................................................................................................... 18

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

4.1 Perceptions about Regulation ...................................................................................... 20

4.2 Perceptions about Taxation .......................................................................................... 22

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

5.1 Problems with Perceptions and Use of Rankings ........................................................ 25

5.2. Perceptions of Manufacturing Finns ........................................................................... 25

5.3. Perceptions of IT Finns ............................................................................................... 26

5.4 Similarity in Perceptions .............................................................................................. 28

5.5 Differences in Perceptions for Different Types ofFinns ............................................ 30

5.6 Comparisons with Earlier Surveys ............................................................................... 32

5.7. The Link to Innovation ................................................................................................ 32

VI. ROLE OF THE BULGARIAN GOVERNMENT AND

BUSINESS ASSOCIA TIONS .................................................................................................. 34

6.1 The Role of the Bulgarian Govemment.. ..................................................................... 34

6.2 The Role of Business Associations .............................................................................. 37

TABLE OF CONTENTS

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

7.1 General Findings ...........................................................................................................41

7.2 Specific Findings for Manufacturing and IT Firms .................................................... ..42

7.3 Key Recommendations .................................................................................................44

7.3.1 Policy.....................................................................................................................44

7.3.2 Institutional. ...........................................................................................................45

7.3.3 Legislative .............................................................................................................45

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

ANEX,ES.....................................................................................................................................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

Table 1

Table 2 Table 3 Table 4

Figure 1

Figure 2

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Figure 5

Figure 6

Figure 7

Figure 8 Figure 9 Figure 10 Figure 11

Figure 12

Figure 13

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Figure 15 Figure 16

Figure 17

Figure 18

Figure 19 Figure 20

···rEN'l'S

Although improvements have not been unifonn - and some setbacks 6 have occurred - Bulgaria's Doing Business ranking has improved since 2004 Time and cost of starting a business, selected countries 16 Time and cost of closing a business, selected countries 18 Characteristics of members and non-members 38

Although the burden of regulation is higher in Bulgaria than in the 5 best perfonning countries in the EU, it has improved in recent years Bulgarian finns reported spending more of their time dealing with 7 regulations in 2008 than finns in other recent entrants to the EU Manufacturing finns report that their senior managers spend about 5 8 percent of their time dealing with regulatory requirements in 2009 Fewer managers of manufacturing finns said that regulatory policies 8 were interpreted inconsistently or unpredictably in 2009 than said the same in 2007 In 2007, finns in Bulgaria were more concerned about the 9 predictability and consistency of how regulations were interpreted IT finns were less likely to report applying for licenses and 11 Compulsory certificates than manufacturing finns Dealing with licenses and Compulsory certificates in tenns of time 12 and money IT finns reported fewer inspections than manufacturing firms 13 Few finns had complaints about the delivery of service by inspectors 14 Dealing with compulsory inspections in tenns of time and money 14 Finns that registered electronically were less likely to say that 16 registration procedures were too costly or took too long Few tinns use electronic registration although the number is 17 increasing In the areas of regulation, the most serious concerns for 21 manufacturing finns are competition protection law, Compulsory certificates, standards and certification, and the stability of policy by the authorities IT finns had different perceptions about the investment climate than 21 manufacturing finns Few manufacturing finns complained about any area of taxation 23 Very few managers of IT finns complained about any area of 24 taxation Practices of infonnal finns, corruption, and access to finance are the 26 areas of the investment climate that Bulgarian managers of manufacturing firms were most likely to say were serious concerns IT finns had different perceptions about the investment climate 27 compared to manufacturing finns IT finns have greater losses due to crime 28 In 2008, very high percentage of companies in Bulgaria identify 29 unfair competition practices from infonnal business as major impediment

Tr\"Bl.E OF' CONTENTS

Figure 21

Figure 22

Figure 23

Figure 24

Figure 25

Box 1 Box 2

Index of unreported economic activity in Bulgaria (2003-2009) 29 Percent of companies identifYing corruption as the first major 30 impediment in EU-l 0 (2008) Small firms were more likely to say that tax rates, access to land and 31 finance, corruption, and informality were serious problems than other firms Older manufacturing firms are more likely to belong to business 37 associations than new manufacturing firms or IT firms For firms that belonged to business associations, the most common 39 forms of support were resolving disputes with officials, workers or other firms

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

i. iT~. _... ' ·1 i1-"'1 ~II~N"I""S . '.JI ..... . ,", ..1.

This report has been prepared as a part of the ongoing Regulatory Refonn Economic and Sector Work of the World Bank. The World Bank team was led by Evgeni Evgeniev, Private Sector Development Specialist, Finance and Private Sector Development Department (ECSPF), and comprised George R. Clarke (Consultant, international expert, Texas A&M International University), John Gabriel Goddard (Economist, ECSPF) and Yana R. Ukhaneva (Consultant, ECSPF). Snejana Dimitrova, Director of Strategic Planning and Governance Directorate and then Director of the State Administration Directorate at the Council of Ministers (until November 2009), Tzveta Kamenova, Director of the Economic and Social Policy Directorate, Council of Ministers, and Pavel Ivanov, Chief Expert, State Administration Directorate, Council of Ministers, collaborated closely with the team since inception of the task and provided strategic guidance at all stages of the work. The World Bank team would like to thank the Government counterpart for funding the Administrative and Regulatory Costs Survey, which is the main source of infonnation for this report. The survey tool was designed by George R. Clarke, Evgeni Evgeniev and John Daniel Pollner, all from the World Bank. Anne T. John, Marga O. De Loayza, Nikolinka Ivanova and Vessela Stambolyiska, all from the World Bank, provided precious technical support. This report is also a result of the devoted work of the translator, Chavdara Bosilkova, who made its final Bulgarian version possible.

The report was prepared under the general guidance of Theodore O. Ahlers (Country Director for Bulgaria since May 15, 2009) and Peter C. Harrold (Country Director for Bulgaria since January 25, 2010), Fernando Montes-Negret (Sector Director, ECSPF until December 21, 2009), Gerardo Corrochano (Sector Director, ECSPF since February 15, 20 I 0) and Sophie Sirtaine (Sector Manager, ECSPF). Florian Ficht! (Country Manager for Bulgaria) provided strategic guidance to the team during the process of consultation with public and private actors and contributed with valuable comments on earlier drafts.

The team thanks Irina Astrakhan (Lead Private Sector Development Specialist, ECSPF), Paulo Correa (Lead Economist, ECSPF), John Daniel Pollner (Lead Financial Officer, ECSPF), and Sophie Sirtaine (Sector Manager, ECSPF), and Stella Ilieva (Senior Economist), all from the World Bank, for reviewing earlier drafts of the report and providing helpful comments and suggestions. Thanks also goes to Marc Reichel (international expert on administrative barriers). The World Bank team is also appreciative of the feedback received during the July 6, 20 I 0 public meeting of the Council for Economic Growth and of the support of colleagues from line ministries and public agencies, of their willingness to share infonnation and valuable insights.

Peer reviewers of the report were Jorge Luis Rodriguez Meza (Program Coordinator, Global Indicators and Analysis, World Bank) and Alistair Nolan (Head of the Investment Compact for Southeast Europe, OECD). The team would like to thank everybody for their contributions.

EXECUTIVE SUMlVlARY Context and Objectives

Bulgaria has achieved progress in recent years towards the "Better Regulation" Agenda. With its accession to the EU, Bulgaria first made progress in the area of regulatory reform by adopting the European legislation through the acquis communautaire. In 2002, Bulgaria moved further with the establishment of the Council for Economic Growth, and, in 2003, with the adoption of the Act on Limiting Administrative Regulation and Administrative Control on Economic Activity (LARACEA). The Council promoted the introduction of the Regulatory Impact Assessment in Bulgaria, which was also an important step ahead.

Since 2008, business confidence increased because the Government put regulatory reform on top of its agenda. The Better Regulation Unit in the Council of Ministers Administration, directly reporting to the Prime Minister, took the leadership role in coordinating government efforts to prepare the Better Regulation Program 2008-20 IO. After its adoption in April 2008, the Better Regulation Unit continued to manage, monitor, and control its implementation, and report annually to the Council of Ministers. As a result, business confidence increased as reflected in 2009 surveys among firms and the Doing Business indicators.

The present Report on the Administrative and Regulatory Barriers to Business is part of an ongoing World Bank Analytical and Advisory support to the Government of Bulgaria in the area of regulatory reform. Since 2006, the World Bank has provided Analytical and Advisory support to the government in this area. In 2007, the Bank reviewed administrative procedures in the tourism, food, and road transportation sectors, calling for reduction and simplification of certain burdensome administrative regimes and emphasizing superfluous regulation at the municipality level. Another report on Bulgaria's Policy for Regulatory Reform in the European Union: Converging with Europe '.'I Best Regulatory Environments recommended a nine-step national strategy that was approved by the Council for Economic Policy on October 19, 2007. The two reports and the consultation process with other line ministries, business associations, and think tanks effectively paved the way for the Better Regulation Program 2008-2010. A June 2009 World Bank study called for a systematic, fair, and transparent regime of state fees. Finally, a forthcoming World Bank study on Ex-Post Impact Assessment of the LARACEA Act aims to provide recommendations to improve the enforcement of the latter.

This report aims to identify ways in which Bulgaria can further remove obstacles to business regulation, recognizing that achieving pre-crisis growth levels, raising labor productivity and improving the business environment will require continued reforms to eliminate administrative and regulatory barriers to business. The main source of information for the report is the 2009 Bulgaria Administrative and Regulatory Costs (ARC) Survey of about 320 firms, mostly SMEs, supplemented with comparative data from other surveys and sources.

The report serves three purposes:

• Providing the economic backdrop and comparators ofBulgaria's regulatory environment. The report puts into context and compares with peers Bulgaria's progress (or lack of such) 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 ofsenior managers ofBulgarian enterprises. The ARC Survey provides testimony of participating firms on the quality of public services delivery and formal procedures with which businesses must comply, and that remain key obstacles to enterprises in the current environment.

• ldent{fying strategic refiJrm recommendations, including regulatory changes, institutional upgrading and capacity building, and legislative amendments.

General Findings

Regulation in Bulgaria is not as burdensome as in many countries in the world. Surveys in Bulgaria suggest that the burden of regulation on managers has been falling in recent years. Senior managers report spending less time on dealing with regulations in 2009 than in 2008 and 2007. In 2008, Bulgaria entered the list of Doing Business Top 10 reformers in the world, underscoring that reductions in the number of procedures, the time to register, the cost of registration, and the minimum capital requirement have made starting a business considerably easier since 2004. Moreover, recent governmental measures for reducing the paid-in minimum capital from EUR 2,500 to EUR 1 for the registration of limited liability companies have been introduced, responding to business needs. Furthermore, corporate taxes were reduced, and the regimes of contract enforcement and paying taxes were improved in recent years.

Yet Bulgaria's position is less favorable than that of many EU countries, and given the challenges ahead, there is room for improvement. Bulgaria's macroeconomic environment was favorable in recent years and this, combined with the benefits of EU membership, allowed the country to attract foreign direct investment and to grow successfully. However, the global financial crisis has been challenging for Bulgaria's export-oriented economy. Over the past two years, output has declined, businesses have closed and workers have been laid off. It has been particularly challenging for SMEs, which found it especially difficult to cope with the contraction ofcredit and the shrinking EU market.

The main challenges to business relate to informality, corruption, lack of transparency, the state fee regime, and the regime to close a business.

". Informality and corruption consistently rank among the top three constraints for businesses.

". Low transparency in policymaking. Concerns about the predictability and consistency of regulation remain higher in Bulgaria than in the other new EU member states from Central and Eastern Europe. There are several reasons for this. First, the LARACEA Act is not functioning well, which creates a burdensome regulatory environment and creates conditions for non-transparency and corruption (e.g. illegal application of local regulatory regimes, duplication of submission of documents, non-transparency of procedures in applying for licenses, permits, etc.). Second, regulatory impact assessments of important legislation are only conducted on an ad hoc basis. Third, the Better Regulation Unit lacks both an official mandate with a direct linkage to the Prime Minister and its own budget.

". The state fees regime is weak, unfair, and non-transparent due to the outdated legal framework, weak institutional structure, and lack of government policy for setting state fees.

". Closing a business is costly and takes time. In recent years there has been progress in reforming the bankruptcy and insolvency procedures, and further progress is expected, as simplii)ring the procedures and reducing the time associated with insolvency cases are among the objectives of the program of 60 anti-crisis measures, adopted in late March 2010 by the new Government. However, Bulgaria still compares poorly with respect to the time and cost ofclosing a business.

Specific Findings

The 2009 ARC Survey provided some other specific findings about regulatory and administrative 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 the inspection cost is high. IT finns reported the highest median cost in dealing with inspections, while new manufacturing finns reported the highest median number of days in dealing with inspections. In the area of taxation, the frequency of changes in tax rules and rates and tax penalties were the most common concerns.

};> The survey also highlighted differences in obstacles for manufacturing and IT firms. Infonnality, corruption and access to finance were identified as serious problems by both manufacturing and IT firms, but IT finns also saw instability, crime, and courts as serious impediments.

};> Regulation is more burdensome for small firms than for large firms. Managers of small finns were more likely to say that regulations and taxation were serious problems than managers of large finns were. Furthennore, managers of small finns were more likely to complain about access to finance and access to land than were managers of large finns. Finally, small finns did appear to be affected more significantly by corruption and infonnality.

};> Business associations are only partly successful in helping their members with information on various aspects of government policy. About one-third of firms in each sector reported that they belonged to a business association. Of these, about half reported receiving benefits from the association. The most common forms of benefits were resolving disputes and obtaining infonnation 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, Government authorities prepared a new Better Regulation Program to cover the period until 2013, which was 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 and regulatory barriers to business in line with EU policies. Specific recommendations to the Government are presented in the Summary Matrix. In addition, further study is recommended on: (i) business exit procedures; (ii) the role of competent authorities and mechanisms set up by the legal framework for protection of competition; and (iii) the relationship between regulatory constraints and innovation.

ItIX

6. Businesses perceive the regulatory environment as non-transparent, the public administration as corrupt, and

icies as low.

state fees.

* Short-term < 1 year; Mid-term 1- 3 years; long-term> 3 years

Long-term

Develop a Policy on State Fees in line with the principles I. The regime of state fees unnecessarily Short-term to and economic criteria set out in the World Bank Report burdens the enterprise sector. Mid-termon Reforming the Regime qfState Fees.

Institutional Mandate the Council for Economic Growth and the

associations. think tanks, and academia 2. The dialogue with national business

Administrative Reform Council to regularly consult key on Better Regulation is intermittent, and Short-term public communication by the

stakeholders on Better Regulation, appoint a spokesperson, and devise a Communication Strategy on

Government on Better Regulation Policy Better Regulation covering the period 2010-2013. is limited.

Give an official mandate to the Better Regulation Unit to management, monitoring, and control of 3. State authority responsible for the

report directly to the Prime Minister. with an established Short-term to the implementation of the Better own budget. Mid-term

is weak. (i) Promote information campaigns encouraging

registration and high cost of 4. Low rate of electronic company

Short-term administrative services.

company electronic registration. (ii) Set up a Working Group chaired by the Ministry of Transport and ITC to implement a Plan to expand e Short-term to government for services frequently used by the business Mid-term sector.

5. State fees for businesses are excessive. Empower a state authority to deal with the state fees regime and adopt a single-cost calculation model for Mid-term

Amend the LARACEA Act to increase its scope and to exist. and municipalities continue to 7. Irregular regulatory regimes continue

Short-term to introduce superfluous new regulations.

cover the afore-mentioned instances. Mid-term

8. Regulatory Impact Assessments are Amend the Law on Normative Acts to introduce RIA as used ad hoc. a mandatory tool for important legislation and policies,

Short-term toas well as for EU regulations and directives to be

Mid-termtransposed in Bulgarian legislation, and with a special focus on the on SMEs.

9. Frequency of inspections is high, and Amend the LARACEA Act to set up an external control they are burdensome for businesses. and sanctioning mechanism over civil servants and Short-ternl to

improve coordination among inspection bodies. Increase Mid-term fines while the nrf'''p'oo

10. The Act on State Fees is outdated and Amend the existing State Fees Act or adopt a new Act, does not support a modem fee structure based on analysis to be undertaken and new policy Mid-term

economic rationale for fees. "rlrmtf'rl for the state fees II. New firms are less likely to be Adopt a Business Associations Act to strengthen the

members of business associations; functions of business associations in supporting their business associations are not fully members.

Mid-ternlsupportive of their members in providing information for overcoming regulatory and administrative burdens. 12. IT firms suffer from instability of the the competition function of the IT regulatory environment and time for sector and undertake a review of the regulatory

Mid-term to dealing with regulations and they have framework.

Long-termhigh concerns about protection of

SECTION I

INTRODUCTION

1.1 Background

Business confidence increased as a result of Bulgaria's significant progress in recent years towards the "Better Regulation" Agenda. As an EU Accession Member, Bulgaria made progress in the area of regulatory reform by adopting the European legislation through the acquis communautaire. In 2003, the country advanced with the adoption of the Act on Limiting Administrative Regulation and Administrative Control on Economic Activity (LARACEA) and with the establishment of the Council for Economic Growth (CEG) one year earlier. In fact, the CEG promoted the introduction of Regulatory Impact Assessment (RIA) in Bulgaria, which was also an important step ahead. In 2007, the Ministry of Economy and Energy emerged as a strong champion of Regulatory Policy and RIA initiatives by working closely with other line ministries, business associations, think tanks and the World Bank. One year later, the leadership role was transferred to the Better Regulation Unit at the Council of Ministers (CoM) Administration, directly reporting to the Prime Minister. 1 This unit took the lead in coordinating government efforts to prepare the Better Regulation Program 2008-20 I 0.2

Thus, the Government put regulatory reforms on top of its agenda and the business increased its confidence in the government policy in this area as reflected from 2009 surveys among firms and the Doing Business indicators.

This report is part of the ongoing World Bank Analytical and Advisory support to the Government of Bulgaria in the area of regulatory reform. The collaboration between the Government and the World Bank through World Bank Analytical and Advisory support since 2006 contributed to Bulgaria'S progress in the area of regulatory reform. The first joint World Bank and Ministry of Economy and Energy report that came out in October 2007 analyzed administrative procedures in three sectors of the economy -- tourism, food, and road transportation sectors - calling for reduction and simplification of certain administrative regimes that are burdensome. It emphasized superfluous regulation at the municipality level as well. Another report on Bulgaria's Policy for Regulatory Reform in the European Union: Converging with Europe's Best Regulatory Environments recommended a national nine-step strategy that was approved by the Council for Economic Policy on October 19, 2007. The two reports and the consultation process with other line ministries, business associations, and think tanks paved the way for the Better Regulation Program 2008-2010, approved by the Bulgarian Government in April 2008. A more recent World Bank study, which came out in June 2009, called for a systematic, fair, and transparent regime of state fees. In collaboration with the Ministry of Economy, Energy and Tourism, a study on Ex-Post Impact Assessment of the LARACEA Act provide recommendations for amendments to the Act to improve its enforcement.

For more information regarding policies and measures of the Bulgarian Government in the regulatory reform area, see World Bank (200gb). I

The "Better Regulation" Agenda in Bulgaria is challenged by the impact of the global financial crisis. The recession in high-income countries, which had an impact on the demand for Bulgaria's exports,3 and the global financial crisis, which reduced capital inflows thus lowering domestic demand, hit Bulgaria in late 2008 and the economy contracted.4 Unlike in high-income countries, the global financial crisis is having a different impact in Bulgaria - it is not a finance crisis, but it is a demand crisis. Tn addition, the real exit rate for firms in Bulgaria has been much higher than expected.5

With the demand crisis and the high real exit rate for firms, increasing the productivity of the Bulgarian economy to converge with the EU-average and developing a friendly business environment remain highly challenging for Bulgarian policymakers. The new Bulgarian government introduced prudent fiscal policy and achieved low gross debt as a response to the global financial crisis. International rating agencies, like Moody's and Standard & Poor's, have increased their ratings for Bulgaria in late 2009 and early 2010, which is expected to further increase international business confidence in the Bulgarian economy.6 However, the Bulgaria government needs to sustain the efforts to raise labor productivity and compete on global markets. Bulgaria will need to have, on one hand, a labor force with the capacity to innovate - absorb, adapt, develop and commercialize new technologies and processes. On the other hand, Bulgaria will need to have a more friendly business environment with a sound regulatory system to correct for market failures that inhibit productive and innovative investment and to reconcile the interests of firms with the interests of society.

The new Government adopted several Programs, introducing concrete measures in the area of regulatory and administrative reform. The new Bulgarian Government, which took office in July 2009, introduced short-term economic measures aimed at the recovery of the economy in the context of the global financial crisis.7 One of the strategic objectives of the Governmental Program was the introduction of legislative and regulatory measures to reduce restrictions and bureaucratic obstacles to the development of businesses and to encourage foreign investment. A number of measures to improve the business environment were envisaged to be implemented by April 2010. AdditionaIly, at end-January 2010, the Bulgarian Government adopted a Convergence Program for the period until 2012, targeting improvement of the business environment, among other objectives. The Convergence Program re-confirmed the commitment of the previous government to reduce the administrative burden by 20 percent

J Germany, Italy and Greece (circa 10 percent from Bulgaria'S export market share. each) -- are expected to achieve a c1ose-to-zero economic growth in 2009 and 2010 as per IMF (October 2009). 4 The country slowed down from an average of 6 percent (y-o-y) between 2003 and 2008 to -5 percent in 2009 (NSI preliminary 2010 data). A modest growth of 03 percent is expected in 2010. Foreign direct investment (FOI) declined substantially. reaching ca. EUR 3.2 billion in 2009 (9.5 percent of GDP) compared to EUR 6.5 billion in 2008 and EUR 8.5 billion in 2007. 5 As per recent World Bank studies, about 80 percent of firms in Bulgaria interviewed in mid-2009, declared that the main effect of the crisis was a drop in demand (Ramalho, Rodriguez-Meza and Yang, 2009). This is similar to what has been reported for other countries from the region, such as Hungary. Latvia, Lithuania. Romania and Turkey. Basic metals, construction, non-metallic mineral products. information technology (IT), garments and textiles are the sectors that have suffered the most in all six countries in terms of sales and capacity utilization decline (Correa and lootty. 2009). Moreover, younger firms « 5 years old) experienced a larger contraction compared to older firnls in all six countries. That is particularly valid for Bulgaria. as these firnls declined by 46 percent between July 2008 and July 2009, compared to 37 percent of decline in older (> 10 years old) manufacturing firnls. Moreover. innovative finns in all countries, including Bulgaria. reported also higher drops in demand compared to non-innovative tirnlS (0.29 percentage points. on average). Furthermore, based on the World Bank Financial Crisis Survey, Ramalho. Rodrfguez-Meza, and Yang (2009), and Correa and Iootty (2009) also found that many companies in Bulgaria were not located - suggesting that the real exit rate in the economy might be much higher than the 0.9 percent of firms in the survey sample that were confirmed to have closed down or were in a process of closing down. In fact, Bulgaria turned out to be the second highest in the sample (after Romania) based on this criterion. 6 On December 1. 2009 Standard & Poor's upgraded the outlook of Bulgarian sovereign debt from negative to

" • I .l_.'~ ;""W(w"'n the outlook on the Bulgarian government's Baa3 ratings to positive from stable on

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 among Government, business and labor unions led to the adoption of another Governmental Program of 60 anti-crisis measures, two of which aim at improving the business environment. The first measure is in terms of the adoption of a timetable for the accelerated development of a fullrange electronic government to reduce corruption and increase transparency and efficiency of public expenditures, as well as to reduce fees for services. The second measure targets simplification 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 removing obstacles 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 boost economic growth. Indeed, regulatory burden seriously affects productivity, competitiveness, and firm growth and influences foreign direct investment decisions. By contrast, well-designed administrative procedures can help stimulate business activities, productivity, and firm growth (see Annex 1 for more information on the relationship between economic growth and regulatory reform).

1.2 Sources ofInformation and Report's Objectives

The report uses data from surveys, information from reports of governments and international institutions, as well as analysis from secondary sources. The report uses comparative data from the World Bank Enterprise Survey and Doing Business Report on EU10 economies8, Business Environment and Enterprise Performance Survey (BEEPS), Bulgaria 2009 Administrative and Regulatory Costs (ARC) Survey, communications and reports from the EC, Government, OECD and World Bank, as well as secondary literature. More detailed information about the sources of information is provided in Annex 2.

The report serves three purposes:

• Providing the economic backdrop and comparators of Bulgaria's regulatory environment. The report puts into context and compares with peers Bulgaria's progress (or lack 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 ofBulgarian enterprises. The ARC Survey provides testimony of participating firms on 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.

• Ident(fYing strategic reform recommendations, including regulatory changes, institutional upgrading and capacity building, and legislative changes.

1.3 Structure ofthe Report

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 objective questions 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 about regulation and taxation, whereas Section 5 compares responses on regulatory constraints to responses about other investment climate constraints based on results of surveys. Results across time are also compared. The link to innovation based on descriptive statistics and econometric analysis is separately discussed. Section 6 emphasizes the role of the Government and the role of business associations in reducing administrative and regulatory burden to business in Bulgaria. The final Section 7 presents conclusions and provides key recommendations in the policy, institutional and legislative areas to reduce administrative and regulatory barriers to business in Bulgaria.

SEC1~ION II OVERALL BURDEN OF REGULATION

This section will provide information on the regulatory burden in Bulgaria, how it has changed over time, and what enterprise managers see as the main areas where improvement is possible. Measuring the burden of regulation is difficult to do. Because of this, this section will present information from various sources to demonstrate the robustness of the analysis to different measures of regulation. In addition to using information from the ARC Survey, this section will also present information from the BEEPS, World Bank Enterprise Survey, the Doing Business Report, and other sources where appropriate.

2.1 Bulgaria's "Doing Business" Standing

Regulation in Bulgaria is not as burdensome as it is in many countries in the world, but Bulgaria's ranking in the Doing Business is less favorable than that of many EU countries. In the most recent Doing Business 2010 Report, Bulgaria ranked 51 st out of 181 countries. Although this shows that regulation is not as burdensome as it is in many countries in the world, Bulgaria compares less favorably with both other countries in the EU and with the new entrants to the EU from Central and Eastern Europe (see Figure 1). As well as ranking below countries such as the United Kingdom, Demark, Ireland and Finland, Bulgaria also ranks below recent EU entrants such as Estonia, Lithuania, Latvia, Slovenia and Slovakia. This suggests that Bulgaria could improve its rankings further.

1: Although the burden of regulation is higher in Bulgaria than in the best performing

rn"n1',""'C in the EU, it has improved in recent

120

97100

82 73 76 80

60 48 Sl 52 54

40 42 43

40 33 35

26 27 28 29 31

17 18 21 22

20 8 11

4 6

0 :.0:: -0 v CJ c >- CJ r;J (;.J Vl r;J Vl CJ CJ CJ >- v Q~ c C (;.J C E U v ~c CJ :J C C .... '" c ci. u":J r- :J C c:c '- ..>L CJ C Qv l: c c ~ r;J CJ CJ'" ~ ~ § .", 3 a. t;:; a.'" cc a:CJE c V1 '" E 2£' '" :J -' '" '"'- '" :J >- '" :> :> V) 2£' c '" E 0 .c 2:.:

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cr: u"0 t.? -'

~

:S z

Source: Doing Business 2010 (World Bank, 200gc).

Note: This ranking does incorporate the change in the DB2010 methodology.

The fact that there is still room for improvement should not overshadow the progress that Bulgaria has achieved over the past five years with respect to its Doing Business rankings. Although there have been some areas in which Bulgaria's relative positions have

--

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 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 reduced.

Table 1: Although improvements have not been uniform - and some setbacks have occurred Bulgaria's Doing Business ranking has since 2004

-....--.--~-------------------------------------------

2004 or earliest 2009Indicators available

Sltu llHe a Business Procedures {number) 11 4 Time (days) 18321---.-.__. .---.-.

lOA 1.7. Cost {% of income Eer caeita) 20.7Min. capital (% of income per capita) 86.7

20Dealing with Construction Procedures (number) 24 Permits

Time (days) 127 139 Cost (% of income per capita) 475.2 436.5 Procedures (number) rRegistering Proeerty 9 8 Time (days) 19! J5

204 2.3Cost (% ofEroEert~ value) Strength oflegal rights index (0-10) ~gCredit 88 Depth of credit information index (0-6) 3 6 Public registry coverage (% of adults) 34.81.3 Private bureau coverage (% of adults) 0 6.2

Protecting Investors Extent of disclosure index (0-10) 10 10 Extent of director liabilit:.l: index (0-10) I I Ease of shareholder suits index (0-10) 7 Z Strength of investor 2.rotection index (0-10) 6.§

31 17Eying Taxes ______rfayments {number Eer ye~.___._. Time {hours eer year) 616 616_. Total tax rate (% erofit) 31.446

Trading Across Borders Documents to export (number) 7 5 Time to exe0rt {da~s) 26 23 Cost to eXl~ort (US$ eer container) __ 1233 1551

1---Documents to imeort (number) 10 7 Timeto import (days) 25 21 Cost to import (US$ eer container) 1201 1666

~-. Procedures (number) ]n orcmg Contracts 40 39 Time {dal::s) 564 5641f---. 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 i Cost(% of estate) 9 9

Source: Domg Busmess 2010 (World Bank, 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 includes improvements through June 2009, the new government has reduced minimal paid-in capital for limited liability companies to EUR 1 from EUR 2,500. This emphasizes the potential for continued improvement along a number of dimensions.

2.2 Findingsfrom Surveys

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 of regulation, the ARC Survey -- and the earlier BEEPS and Enterprise Survey - collect information on firms' actual experience with regulations and regulatory authorities .

.. t..~;"""'~n thp Dninf! Business indicators and survey data can, therefore, be the resu1t

of uneven implementation of regulatory requirements, differences between written regulations and the way regulations are implemented, and differences in the scope of coverage.

Survey evidence suggests that the burden of regulation on managers in Bulgaria appears to be continually falling in recent years. There are also many similarities between the Doing Business Report and the surveys in terms of general results. In the 2009 ARC Survey, the 2007 Enterprise Surveys, and the 2008-09 BEEPS, firm managers in Bulgaria were asked how much time senior management in their firm spent dealing with regulatory requirements such as dealing with officials and completing forms - including taxes, customs, labor regulations, licensing and registration. In 2007, the average manager of a manufacturing firm reported that senior management spent about 17 percent of their time dealing with regulations. In 2008, the average manager reported spending about 9 percent of his/her time doing the same. By 2009, the average manufacturing firm manager reported that his/her senior management spent about 5 percent of their time dealing with regulatory requirements. Consistent with the results from the Doing Business, this suggests that the burden of regulation has declined significantly in Bulgaria in recent years.

Figure 2: Bulgarian firms reported spending more of their time dealing with regulations in 2008 than firms in other recent entrants to the EU

16%

13.5%14% 12.8%

12%

u 10.4% 10.6%

9.7709.2.% 9.3%10%

6.7%

6%

4%

8%

5i I 7.3%

2%

0%

Source: BEEPS (2008-09).

Note: Figure 2 includes information on all sectors, not just manufacturing firms.

At this time, the average time that senior managers reported spending dealing with requirements imposed by government regUlations was 10.6 percent of their time (see Figure 2). This was slightly higher than in most other new EU member states from the Central and Eastern European region. For example, the average manager in Estonia reported spending only about 5.5 percent ofhis/her time.9

The burden of regulation imposed on managers, however, differs across sectors and across old and new firms. As per the 2008 BEEPS, the average time that senior managers reported spending dealing with requirements imposed by government regulations was 10.6 percent of their time (see Figure 2 above). In the 2009 ARC Survey, although the average senior manager of a manufacturing firm reported spending only about 5 percent of his/her time dealing with regulation, managers of new manufacturing firms and IT firms reported spending longer doing the same thing. In particular, senior management of a new manufacturing firm spent 10 percent of their time and the average manager of an IT firm reported that their senior management spent about 11 percent of their time doing the same (see Figure 3).

9 Throughout the report. whenever the tenn the 'average manager,' 'average finn,' or 'median finn,' or 'median manager' is used, it refers to the average or median response on that particular question. This is m:f'O h""

Figure 3: Manufacturing firms report that their senior managers spend about 5 percent of their time dealing with regulatory in 2009

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.c:....'3 8% 0.0 l: .,.

C ~ 40 'jG~ a r= -s'" .-CL -g(;j 30% 0.0 l:c .5

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Concern about the predictability and consistency of regulation is bigher in Bulgaria compared to the other new EU entrants. In the 2007 Enterprise Survey, about 75 percent of finn managers - and 72 percent of managers of manufacturing finns - in Bulgaria either strongly disagreed or tended to disagree with the statement that laws and regulations were interpreted consistently and predictably by public authorities. This was higher than in the other new EU entrants and higher than in 2005 (see Figure 5).

l Figure 5: In 2007, firms in Bulgaria were more concerned about the predictability and consistency of how regulations were interpreted -~~ ---~-.-,,, - -- -------,~~,,~~-,,~,-~ 80%

70%

60%

50%

30%

20%

10%

0%

Source: BEEPS (2005) and Enterprise Survey for Bulgaria (2007).

Note: 2005 BEEPS data are provided for all other new EU member states. This figure contains information on all firms - not

just manufacturing firms.

Despite the high level of concern about the predictability and consistency of regulation, it is important to note that the concerns of manufacturing firms appear lower in 2009 than in 2007. Since the 2009 ARC Survey only contained manufacturing and IT firms, it is not possible to compare perceptions for all finns. It is, however, possible to compare the perceptions of managers of manufacturing finns across the two samples. Making this comparison, fewer managers of manufacturing finns said that regulatory policies were interpreted inconsistently or unpredictably in 2009 than those who said the same in 2007 (see Figure 4). In fact, concerns appear to have fallen to levels similar to the levels observed jn 2005.

Enterprises in the IT sector were also concerned that regulations were enforced inconsistently and unpredictably. About 63 percent of IT finns said that regulations were enforced unpredictably and inconsistently. In comparison, only about 57 percent of new manufacturing finns said the same (see Figure 4).

The higher levels of concern about unpredictable and inconsistent enforcement of regulation among IT firms are also reflected in other questions in the ARC Survey. In particular, as discussed later in greater detail, finn managers were also asked whether instability of regulatory policy and inconsistent application of regulations was a serious problem for their finn. Managers of IT finns were also more likely to say that these areas of regulation were serious problems than managers of other firms were. About 23 percent of IT finns said that each represented serious problems, compared to about 12 percent of manufacturing firms that said that inconsistent application of regulation was a serious problem and 14 percent that said that instability of regulatory policy was a serious problem. 10

Overall, regulation in Bulgaria is not as burdensome as it is in many countries in the world, but Bulgaria's ranking in the Doing Business is less favorable than that of many EU countries. Although there have been some areas in which Bulgaria's relative positions have 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 of registration, 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 reduced for paying taxes. Moreover, survey evidence suggests that the burden of regulation on managers in Bulgaria appears to be continually falling in recent years. For example, senior managers report spending less time dealing with regulations in 2009, compared to 2008 and 2007. However, it is important to emphasize that senior managers of IT firms and new manufacturing firms report spending more time on dealing with regulations compared to old manufacturing firms in 2009. Although the burden that regulation imposed on managers has fallen in recent years, concerns about the predictability and consistency of regulation remain higher 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.

SECTION III

SPECIFIC 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 other sources such as the Doing Business Report, this section will emphasize areas such as the number of inspections and information on a number of licenses and compulsory certificatesll

that firms have applied for in the past couple of years. Some administrative and regulatory costs for businesses shall be presented as welL

3.1 Frequency ofInteractions with Regulatory Authorities

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 ARC Survey, firms were asked whether they had had to apply for a number of licenses and compulsory certificates to produce or sell any of its products or services in the past year or past two years. 12 Before looking at the time and costs of these interactions, this section will present information on how common these interactions are.

Figure 6: IT firms were less likely to report applying for licenses and compulsory certificates than " ...,:nuln" firms

70%

60%

50%

40%

30%

20%

10%

0%

Compulsory Trade License certificate in in past two

past year years

Oper

they had to apply for compulsory certificates, about 27 percent of new manufacturing firms and 37 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 old manufacturing fim1s and 14 percent of IT firms said that this was the case. Far fewer firm managers 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 new manufacturing firms and close to three-quarters of old manufacturing firms said that this was the case, compared to about 40 percent of IT firms (see Figure 6). This suggests that inspections have the potential to be a significant burden on firms because businesses are subject to numerous inspections due to multiple types of administrative regulations. The high frequency of inspections is also likely to be a result of lack of good coordination among inspecting bodies, which produces a burden for the business.

3.2 Compulsory Certificates, Operating Licenses, and Trading Licenses

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 much time 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 (see Figure 7). This was slightly shorter than the median responses given by firms that got trade and operating licenses (10 and 15 days, respectively).14 Although this suggests that the amount of work is not overly burdensome, it is important to note that several firms reported far longer times - in excess of one year, for getting general trading licenses and compulsory certificates.

t Figure 7: D.ealing with Ii:enses ~nd_~_~~.~~~~~y-ce~!!i.~~tes i~~:.~".:'~of ti~e and ~neL._________..___ . Median Days to Deal with Average Cost of Lev in Dealing Licenses and Compulsory with Licenses and Compulsory

Certificates Certificates

Operating license Operating license

Trading Jnd general Trading and general

licenses licenses •-

Compulsory Compulsory

CertficlJtes CertficiJles -

o 5 10 15 20 o 2000 4000 6000

Source: Bulgaria ARC Survey (2009).

Note: Only includes firms reporting that they received that type of license.

13 Because only a small number of firms applied for some licenses, it is not possible to divide the sample into new manufacturing firms, old manufacturing firms and IT fimls. As a result, in several sections, unweighted averages are presented rather than weighted averages. This is because weights were not available for the firms in the IT

~ -.~.~ ~~ tJ.. .. "?w manufacturing firms due to the sampling methodology, , .

http:respectively).14

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 these questions suggested that they spent less time getting compulsory certificates than other licenses, the median monetary cost was higher for getting compulsory certificates than for either 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 multiplied for getting compulsory certificates.

3.3 Inspections

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 report inspections than getting licenses, data is presented for different groups of firms separately. The most common inspections are tax inspections, National Social Security Institute (NSSI) inspections, and, for old manufacturing firms, hygiene inspections. IT firms reported fewer inspections than manufacturing firms did (see Figure 8). The average response for IT firms was only about 0.5 tax inspections per year and even fewer of other types of inspections. In this respect, the burden of inspections is far less for IT firms than for other types of firms. This evidence is consistent with the evidence on perceptions that suggests that IT firms are less concerned about inspections than manufacturing firms are.

I Figure 8: IT firms reported fewer inspections thaI'!. manufacturing firm~

2,0

1.5

'" .2" 1,0~

0.

E'" '0 (;; 0.5 .0 E;:, z

0,0

NSSI Police Hygiene Fire Environmental lax

IT • New Manufacturing Old Manufacturing

Source: Bulgaria ARC Survey (2009).

Note: One extreme outlier, which reported 200 tax and NSSI inspections, is excluded from the average.

New manufacturing firms also, for the most part, reported fewer inspections than old manufacturing firms did. The main exceptions to this were tax and environmental inspections - new manufacturing firms reported more of these than other firms did.

v

Figure 9: Few firms had complaints about the delivery of service by inspectors

As discussed above, frequency of interactions, time and cost for business related to dealing with inspection authorities in Bulgaria have the potential to be a significant burden on firms. See Box 1 for a summary of the main weaknesses of an inefficient inspection system and solutions for transforming the inspection regime into an instrument to increase accountability and transparency. l!!~~: Business Inspections. Issues, Solutions, Implementation and I\,II~E,~. ".~"."~

Diagnosing the situation Solution DeSign

- Common complaints by Investors lInvestment CliMate Surveys, Admin Bal'fler • Movillg from 'control &punishing mentality' to Studies)? compiiance orientation" In IOspectorates 'Na\!ooa: Inspectorate IMprovement

Prtgram • SubstaN:al time ana cost involved (Doing Business ;n 2006, AdmIn Barrier Stuoies. Investnlem Cllmate Surveysi?

• Ol'-srte aomimst'{) fur investors

-Intimidatmg and aggressive oohai/oOr of the ·nspectors?

• Coordiratlon among dlflereflt inspectorates andior corresponding line mimstnes

-Eflectve moortoring and evalua~oo n'echan>sm In place to assess the progress in reform implementation?

- Ineffective/Non-exlstant appeal meehanisn'?

- Public iJrivate sector dialogue on inspectior ,ssues

• Appropriate incentive MeC~anism -Are l'ley effective ,n at aenievlng thel' stated purpose le,g" safeguarding human ~ea1~, safely and l~e environMenW

• Perfom1ance ,ndicators tor inspectors and 'nspectorates

Source: IFe, www.ifc.org.

3.4 Barriers to Entry

Bulgaria has reduced the barriers to starting a business considerably over the past five years. In 2004, new businesses had to complete 11 procedures that took 32 days and cost over 10 percent of per capita GNI to complete (see Table 1). By mid-2009, this had been reduced to 4 procedures that took 18 days and cost less than 2 percent of per capita GNI to complete.

Firms in Bulgaria were relatively satisfied with registration procedures. Only about 12 percent of managers of manufacturing firms and 4 percent of IT managers said that it was a serious problem for their business. ls Although this might suggest that firms are unable to see much room for improvement, it is however important to note that about 52 percent thought that costs should be lower and about 47 percent reported that the time should be reduced further (see Figure 11). It is believed that the new measures of the government for reducing paid-in minimum capital from EUR 2,500 to EUR 1 for registration of limited liability companies meet business needs. This puts Bulgaria in line with European best practices. l6 However, it seems there is room for improvement, regarding the time to register a business (see Table 2).

http:practices.l6http:business.ls

Table 2: Time and cost of starting a business, selected countries

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

The Government has improved the registration procedures in two ways. One way in which the government has improved business registration is by transferring procedures away from courts to a special Registration Agency. Another way in which the government has facilitated business registration is through the introduction of electronic Trade Registry in early 2008, and, as we know, introduction of electronic registers for businesses reduces time to register, requires fewer procedures and costs less (Klapper and Delgado, 2007).

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

Uigure 11: Firms that registered electronically were less likely to say that registration procedures were too costly or took too long

--~-~-"~-~,~~,-..--~------..--~-------.--.,.--~-~~-~ "-".. -~

(; 60(1/0

50%

0 40%.8

30%

~ 20%

a 10%

" a 0"10.8 !l:? -10% All Registered electronically Did not register electronically ID 3':

• Time should be reduced - Cost should be reduced

Source: Bulgaria ARC Survey (2009).

Note: Because there are few firms with observations for each type of registration, unweighted pooled means are presented.

Weights were not available for IT or new manufacturing firms. Only firms that registered or re-registered in 2008 or 2009 are

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 7 percent of firms without broadband connections registered electronically compared to about 23

• ,L l- •• ~~..II",,"... rI £'rmnections.

I Figure 12: Few firms use electronic registration - although the number is increasing

35%

:u 30% -:;; .~ :5: 250/.., ~ "" 1V .~

':5 e 20% ~~

::: Q) 15% o

I'

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

3.6 Closing a Business

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, which remain time consuming and costly. Closing a business has become more problematic recently due to the international financial crisis. Bankruptcy proceedings take long in Bulgaria 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 a business and costs 9 percent of estate value with a recovery rate of32.1 percent (see Table 3). The insolvency procedures are highly burdensome in Bulgaria, and these indicators are lagging far behind the OECD average (1.7 years, cost is 8.4 percent of estate, and 69 percent recovery rate).

l Table 3: Time and cost of closing a business, selected countries CoUiltries

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 in providing better environment for firms to exit is that power has shifted to creditors and court proceedings have been simplified in recent years - bankruptcy cases are heard by the District Court 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 Commercial Register Law (Transitional and Final Provisions § 4. (1)) - if a company does not re-register with 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 forward was also the new package of 60 anti-crisis measures of the Bulgarian Government, which came through 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 for insolvency 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.

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 for compulsory certificates more often than for operating or trade licenses. Getting compulsory certificates was also more costly compared to getting licenses, but it took less time. Survey analysis found that interactions with inspection bodies (e.g. tax, National Social Security Institute, hygiene inspections) were frequent. It was suggested that that businesses are subject to numerous inspections due to multiple types of administrative regulations. Firms did not complain about the quality of service of inspection bodies, and the time for dealing with inspections was quite low. However, the cost of being inspected was found to be high. For instance, IT finns reported highest median cost in dealing with inspections, while new manufacturing firms reported highest median number of days in dealing with inspections. The section also concluded that Bulgaria had reduced the barriers to starting a business considerably over the past five years. For instance, business registration procedures were transferred away from courts to a special Registration Agency, whereas electronic Trade Registry was installed a couple of years ago. In addition, the new measures for reducing paid-in minimum capital from EUR 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 of companies registering electronically was increasing. With respect to closing a business, it was found 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 the time 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 continues to be burdensome for the business due to outdated legal framework, weak institutional structure and lack of government policy for setting state fees.

'I()N IV PERCEPTIONS ABOUT REGUIATION 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 which firms perceive the burden of regulation and taxation. In the area of regulation, firms were asked whether competition protection law, instability of regulatory policy, inconsistent application of regulation, standards and certification, compulsory certificates, environmental regulation, and inspections were serious problems. In the area of taxation, firms were asked about frequency of tax law changes, tax penalties, appeal mechanisms, tax audits, their treatment by the tax authorities, 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 data has some drawbacks, these questions include information on some areas that are not included among the objective questions (i.e., perceptions about competition protection law) and some areas 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 can provide complementary information that confirms the previous analysis. Because weights can be constructed for the manufacturing firms in the sample, the initial analysis will focus on these enterprises. Later parts of the analysis will look at perceptions of IT firms and new manufacturing firms.

4.1 Perceptions about Regulation

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 of manufacturing firms said that these were serious problems (see Figure 13). The ARC Survey does not provide much additional data on two of these areas - competition protection law and standards and certification. This suggests that additional information on these areas would be useful. A previous World Bank report, the 2008 Investment Climate Assessment, addressed the issue of standards and certification in detail (see Annex 3). Concern about the instability of regulatory 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 earlier 2007 Enterprise Survey, they remained more concerned than their counterparts in many of the other new EU entrants from Central and Eastern Europe.

lFigure 13: In the areas of regulation, the most serious concerns for manufacturing firms are competition protection law, compulsory certificates, standards and certification, and the stability of policy by the authorities --------~---"~~~--"---~--

300/3

2 S;}~ QJ => VI

.!!! E 20~/~..... cv ..s:: '" :a ..... 0.,., 15~'J c: Q.

':;:" ::> ro.,., 0 10~~ .."

';::

E ~

'

IT firms are not the only firms that might have different perceptions about regulation, and there is a need for further explanation. It is possible that there are other systematic differences in perceptions about regulation between firms of different types. One way of exploring whether this is the case would be simply to compare average responses across firms of different types. For example, it would be possible to look at how many firms of different types rated a particular regulatory issue as their biggest constraint or how many firms rated it as a major or very severe constraint. Although this approach is intuitive, this is difficult in practice for two reasons. First, the sub-samples of different types of firms are relatively small. Second, there are also systematic differences in other firm characteristics across types of firms. Exporters tend to be both larger than non-exporters and more likely to be foreign-owned. Differences in perceptions between managers of exporters and non-exporters might therefore reflect differences in size or ownership rather than whether their firm exports. If you ignore these, sampling variation can result in apparent differences in perceptions that do not reflect true differences.2o

Econometric analysis for firms with different characteristics demonstrates other interesting results. As noted earlier, IT firms are less likely to say that some areas of regulation are serious problems than manufacturing firms are. In particular, managers of IT firms were less likely to say that compulsory certificates, inspections and environmental regulations were problems. The first two are consistent with objective data - fewer IT firms reported that they had been inspected and fewer also noted that they had had to acquire compulsory certificates (see Annex 4, Table D). There were some other differences. In general, foreign-owned firms were less likely to say that most areas of regulation were serious problems than domestic firms were. The differences were statistically significant for two areas: inconsistent application of regulations and instability of policy. This is encouraging because it suggests that regulation might not be a very serious constraint on foreign investment.

Inconsistent application of regulation and instability of regulatory policy were, however, a greater concern for exporters. In addition, new manufacturing firms were generally less likely to say that most areas of regulation were a serious problem than older manufacturing firms were.

There were few differences between large and small firms. The coefficient on firm size was statistically insignificant in most regressions with respect to regulation -- for both variables that were on both the ARC Survey and Enterprise Surveys and for variables only in the ARC Survey. The only exception was the regression for compUlsory certificates - managers of large firms were less likely to say that these were serious problems than managers of small firms were.

4.2 Perceptions about Taxation

Few firms rated tax rates or tax administration as serious problems in 2009. Only about 8 percent of manufacturing firms said that tax rates were a serious problem and only about 3 percent said that tax administration was a serious problem.

Firms were, however, asked several additional questions about their perceptions about tax administration. In particular, they were asked whether the firm's treatment by tax authorities, completing tax forms, tax inspections, the burden of audits, frequency of rule changes, severity of penalties, and the appeal mechanism were serious problems.

20 These two issues will be addressed with the help of Annex 4. which presents relevant econometric results. First, by using a multivariate regression approach. it is possible to look at differences in perceptions after controlling for other systematic differences between fim1s. Second, it is possible to look at the statistical significance of the results (i.e., to see whether it is likely that the differences are due to random variation). A

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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 these areas of taxation (see Figure 15). The main exceptions are frequency of changes in rules and rates and tax penalties. About 23 percent of manufacturing firms said that these were serious problems.

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Figure 16: Very few managers of IT firms rn....nll"'ir... area of taxation

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SECTION V

REGULATORY CONSTRAINTS RELATIVE TO OTHER

CONSTRAINTS

This section compares survey responses to questions on regulatory constraints to responses to questions about other investment climate constraints. The section focuses on those investment climate constraints that are asked about on the BEEPS, Enterprise and ARC Surveys. This includes some constraints related to regulation and taxation - although not all of the constraints that are asked about in the previous section. This makes it possible to compare results across time. The section also links findings on innovation.

5.1 Problems with Perceptions and Use ofRankings

There are problems using perception-based data, but it makes sense to take concerns of enterprise managers seriously. Since enterprise managers know more about the immediate problems their businesses face than do government officials, academic researchers or other outside 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 constraints they face; (ii) whether the perceptions of the enterprise managers interviewed in the survey reflect what the biggest constraints in the country really are; and (iii) whether perception-based data provides reliable information on constraints that allows researchers to make cross-country and 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 report is because the ARC Survey did not collect any information on rankings (Le., what firms saw as the biggest problem that they faced) and therefore this information was not available.22 Crosstime comparisons will, therefore, be based upon ratings, not rankings.

5.2. Perceptions ofManufacturing Firms

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 20082009 BEEPS, it is possible to compare results from the 2009 ARC Survey with the results from the earlier surveys for these measures. The previous section focused on several areas of regulation and taxation that were not asked about in the two earlier surveys. Before looking at the IT and new manufacturing samples, it is interesting to look at the broader sample of manufacturing firms. 23

21 Although the concerns about using perception-based data are serious, it is important not to overemphasize these problems. Recent work suggests that perception-based measures line up reasonably well with objective macroand 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 concerns about subjective measures, they seem to provide useful information.

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

http:available.22http:comparisons.21

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 firms said that informality was a serious problem and close to 34 percent said that corruption was a serious problem (see Figure 17). Slightly fewer firms said access to finance was a serious problem -- about 30 percent of firms.

Figure 17: Practices of informal firms, corruption, and access to finance are the areas of the investment climate that Bulgarian managers of manufacturing firms were most likely to say were serious concerns

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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 that business registration and licensing was a serious problem, only about 2 percent said that labor regulation was a serious problem, and nearly none said that trade regulation was a serious problem.

5.3. Perceptions ofIT Firms

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 the investment climate to those of manufacturing firms. IT firms were most likely to say that instability, 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 say that informality (21 percentage points difference), access to finance (19 percentage points difference), 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 were smaller.

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Figure 18: IT firms had different perceptions about the investment climate compared to manufacturing firms

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