i s s u e 4 7m a r c h 2 0 0 4

A m e r i c a n C h a m b e r o f C o m m e r c e i n B u l g a r i a

h o m e p a g e : w w w . a m c h a m . b g e - m a i l : a m c h a m @a m c h a m . b gBus in e s s Pa rk So f i a , M lados t 4 A re a , Bu i l d ing 2 , F lo o r 6 , 1 7 1 5 So f i a

Te l . : ( 3 5 9 2 ) 97 6 9 5 6 5 Fax : ( 3 5 9 2 ) 97 6 9 5 6 9

IT BOOM.BGIT BOOM.BG

am cham news !"am cham events !"secondstart of hi-tech sector !" protection ofintellectual property !"anti spam !"tetra!"tax relief !"who is who in trade unions !bulgaria, romania, money & the eu !"commercialregistration !"wagner !"weekend fly !"etc

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We were very enthusiastic and happy during the recent business luncheon with the Bulgaria’s FinanceMinister Velchev, not the least because we had just received the first issue of our re-launched magazine.However, probably to keep my enthusiasm up, the Editor-in-Chief called almost immediately after the lunchreminding me that he needed my address to the readers for the next issue.

So here I am putting aside my preparation for the Economist Conferences' Fifth Business Roundtable withBulgarian government, where the Chamber is once again a proud participant, to fulfill this duty. I am start-ing with a short overview of the past month's activities, but I want to concentrate on what lies ahead, asfuture is more important to all of us.

AmCham has been distinguished recently by its increasing international involvement. Here is a brief accountof what we have done so far:

• We have been recognized by the Economist Conferences as a reliable long-term partner. This lineof cooperation is quite prestigious and useful for the Chamber and its members;

• We were approached by EastEuro Link for partnership during their two-day macroeconomic andfinance conference in Sofia and completed that involvement successfully;

• We were chosen by the Commercial Law Development Program of USAID to develop an IntellectualProperty Rights seminar on IT because of the credibility we have gained;

• By the time you read the magazine we shall have returned from the Southeast Europe AmChamannual meeting in Athens, dedicated to future cooperation between the organizations in the region;

• We have joined the OPIC Investment conference in Bucharest on new business partnerships in theemerging Europe markets.

Partnerships with prestigious international organizations along with our participation in joint cross-countryevents increase the exposure for the Chamber and its members, bringing in experience and expertise.There is no doubt that knowledge and proficiency of this kind will be the key to Bulgaria's success as aNATO and EU member.

Bulgaria's accession to the European Union is in a countdown phase. The good news from Brussels onthe EU financial package to Bulgaria was mixed with other favorable news coming from the NATO head-quarters, as in early April Bulgaria and six other countries will become fully-fledged members of thealliance. All told, Bulgaria is taking giant steps in erasing the geopolitical frontiers that have isolated thecountry from the democratic world for almost five decades.

During the business luncheon with Minister Velchev it was only natural for AmCham to offer the govern-ment its assistance in the final phase of negotiations with the European Union. While accepting the offerin principle, the Minister pointed out that what Bulgaria needs most is some strong political lobbying in allEU member states. The message was clear: AmCham members' voices can be heard and respected bypoliticians and decision makers abroad. Our input during the accession process will make a difference.

We may still foresee other challenges for the future, even thought we may not be able to identify them atthe moment. Let's discuss and take action on how we as a Chamber can provide basic guidance, infor-mation and assistance to the members in areas where future EU rules and regulations could affect them;or give advice on how to apply for different EU programs and support; or share the experience of othercountries from their first years of accession. The Board and the committees would like to hear your takeon these important issues. Input from members is essential so the Chamber continues to be an effectiveand useful tool for your business development, helping all of us meet the challenges of the EU accession.

Best regards,

Valentin Georgiev

Executive Director, AmCham Bulgaria

Dear Members and Friends,

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3M (East) AG . AA KRES EOOD . ABB (Asea Brown Boveri) Ltd. . AbC.R.O.- Bulgaria EAD . Abela Airport Services Ltd. . Abrotea Bulgaria AD . AccorServices Bulgaria . Acsior . ACT Soft Ltd. . Address Bulgaria HoldingJSCo.- A real estate company . ADIS Ltd. . AES Corporation . AFA OOD. Ahrend Profesionalni Interiery S.R.O. . AIG Bulgaria . AIG Life Bulgaria. AIMS Human Capital . Alexandrov Ltd. . Allan Collautt Associates, Inc.. Allied Pickfords Bulgaria . American Bar Association and CEELI .American College of Sofia . American Construction Products JSC . AmericanUniversity in Bulgaria . Amylum Bulgaria AD . Anglo-American School ofSofia . Anton Preslavski, Liebert Hiross . APIS - Hristovich Ltd. . APOLOLtd. . Aries Commerce . Association of Bulgarian Broadcasters - ABBRO .AT Engineering 2000 Ltd. . AUBG - Elieff Center for Education and Culture .Avendi Ltd. . AVON Cosmetics Bulgaria Ltd . BalkanData/Lefkowitz & Co .Balkan ES Team Ltd . Balkan News Corporation Plc. . Balkan Star . BaxterAG . Bayer Bulgaria . BearingPoint LLC . BG Radio . BICD - InternationalBank for Commerce and Development . Bodyguard-Fire-K Ltd. . BorislavBoyanov & Co. . Bristol-Myers Squibb . BTC-NET Ltd. . Bulgarian AmericanEnterprise Fund . Bulgarian Charities Aid Foundation (BCAF) . BulgarianPost Bank . Business Links . Business Park Sofia EOOD . Business toBusiness . CA IB Bulinvest . Cable Bulgaria . Carlson Wagonlit Travel .Cefin Bulgaria EOOD . Center for the Study of Democracy . Cilag AGInternational (Johnson & Johnson) . Cisco Systems Bulgaria . Citibank, N.A.-Sofia Branch . City University . Coca-Cola Bulgaria EOOD . Coca-ColaH.B.C. Bulgaria S.A. . COLLIERS . Combi Trans Bulgaria Ltd. . CompassTranslation Services . ConsulTeam . Contex Drouzhba Ltd. . CorstjensWorlwide Movers Group . CPM International Ltd. . Cresta Marketing S.A. .Curtis / Balkan Ltd. . David Hampson, Grenville . DeConi M&A . Deloitte& Touche . DHL International (Bulgaria) Ltd. . Diageo Bulgaria Ltd . DIMONBulgaria . Djingov, Gouginski, Kyuchukov, & Velichkov . Domaine Boyar AD. Don & Co. . Dow Europe GmbH Representation Office . Dr. Emil Benatov& Partners . Effekten Und Finanz - Bulgaria EAD . Eli Lilly and Company .Elido . Ellen Ruth Greenberg, Ph.D., Dr. I.S. Greenberg Medical Center . EltaConsult Ltd. . Emerson Process Management AG . Encouragement Bank AD. Engineeringservice Sofia Ltd. . Entergy Wholesale Operations . EquestEAD . ERATO HOLDING PLC . Ernst & Young Bulgaria . EURO RSCG NewEurope Sofia . Expo Team OOD . First Global Health Corporation . FlyingCargo Bulgaria Ltd. - Licensee of FedEx . Force Delta Ltd. . General ElectricInternational . Genmark Automation Bulgaria . GEO - CAR Ltd. . GlaxoSmithKline . Goleminov & Goleminov . Group 4 Securitas (Bulgaria) Ltd. .Hayhurst Robinson . HEBROS Bank AD . Hewlett-Packard Bulgaria EOOD. Hilton Sofia . Honeywell EOOD . Horizon . IBM Bulgaria . IdealStandard Bulgaria . In Time Ltd. . Infoguard - Stefan Nedkov . ING BankSofia Branch . Interamerican Bulgaria Ins.Co . Interbrands Marketing &Distribution Inc. . ISI Emerging Markets (Internet Securities, Inc.) .Interpartners Plc. . IP Consulting Ltd. . Junior Achievement Bulgaria .Kolbis International Transfer Corporation . KPMG Bulgaria . Kraft FoodsBulgaria . Lexim Sofia Ltd. . Lindner Immobilien Bulgaria OOD . Lirex BGLtd. . Lowe Swing Communications . M & M Air Cargo Service BG Ltd .M3 Communications Group, Inc. A Hil & Knowlton Associate . Maersk BulgariaLtd. . Magnetic Head Technologies . Management Systems International .Marsh EOOD . McDonald's Bulgaria . Merck Sharp & Dohme IDEA Inc. .Michael Delia, European Bank for Reconstruction and Development (EBRD) .Microsoft Bulgaria . Miltech Ltd. . Moto Pfohe Ltd. . Motorola BulgariaEAD . National DISTRIBUTORS . NDB Ltd. . NDT Equipment Supplies LTD. Net Is Ltd. . NET IS SAT Ltd. . New-I . Nexcom Bulgaria EAD . NokiaBulgaria EOOD . Oracle East Central Europe Limited - Branch Bulgaria .ORBIT Ltd. International Forwarding & Moving . Pain D'or Ltd. . Pfizer H.C.P.Corporation . Pioneer Semena Bulgaria EOOD . Popov Legal Office .PricewaterhouseCoopers . Prima Soft . Procter & Gamble Bulgaria .ProSoft . Radisson SAS Grand Hotel . Rising Force Co. .Rockwell/Intelpack . RTC Mobikom . S&D Chemicals Bulgaria . S&TBulgaria . Sante International OOD . Schering - Plough Central East -Bulgaria . SEAF Management Bulgaria EOOD . Sheraton Sofia Hotel Balkan. Sherita M Ltd. . Smartcom – Bulgaria AD . Sofia Echo Media Ltd. .Stefan Dimitrov, Norman Management Company Ltd. . Student Labour Office. Sun Spree Holidays . TB OSTEOCENTRE BULGARIA EAD . TechnoLogica. The Atlantic Club of Bulgaria . TM Auto Ltd. . TMF . TumbleweedCommunications . Unimasters Logistics Group Ltd. . Unisys Bulgaria Branch. Urban 3000 Ltd. . Via Expo Ltd. . Videolux Ltd. . VOCA Consult Ltd.. Westinghouse Energy Systems Bulgaria Branch . WizCom Ltd. . WrigleyBulgaria . Wyeth-Whitehall Export . Xerox Bulgaria Ltd. . Zlati Dinev Studio

Board of Directors of the American Chamber of Commerce in Bulgaria

President Kenneth Lefkowitz BalkanData/Lefkowitz & Co.

Vice President Stefan Dimitrov Allied Pickfords

Treasurer Dennis Fiehler Bulgarian American Enterprise Fund

Borislav Boyanov Borislav Boyanov & Co.David Hampson Individual memberJanet Heckman CITIBANKRoumen Mihailov 3M (East) AGFriedrich Niemann Hilton SofiaGeorgi Randelov IBM BulgariaMaria Shishkova AIMS Human CapitalElitsa Tsaneva Ideal StandardMaria Vranovska Eli Lilly

Ex-Officio Member Reginald Miller US Commercial Attache

Executive Director Valentin Georgiev

Dear reader:

You may find it a bit strange, but I am rec-ommending that you start this issue withthe back page, humor. We have publisheda marvelous example of office parody,titled Wife 1.0*. Even though it is a partof the entertainment package of AmChamBulgaria Magazine, this witty piece canactually help you read through the publi-cation most effectively. Our articles come from so many differ-ent areas of interest and cover so many topics that mere con-tents upfront may not suffice for your orientation. Therefore, hereis a short quiz. Based on your answers, we will give recommen-dations how to tackle best the deluge of information in Issue #47of AmCham Bulgaria Magazine. Let's start with the test - pickyour likely reaction:

While reading Wife 1.0, you... А: ...come down with hysterical laughter. As soon as you regainyour composure, you quickly forward to everyone on your e-mailcontact list a link to the AmCham web site, where Wife 1.0 canbe found in PDF format along with the rest of the magazine.

B: ...emit a stentorious laugh in front of your amused colleagues,reaching for your cell phone to share the funniest parts fromWife 1.0 with a friend.

C: ...start giggling as soon as you have read the story to youroffice colleagues.

D: ...don't find it funny at all.

Recommendations:For А: Deep inside you are an IT person. Start reading the mag-azine from the cover story, Second Start for IT Business inBulgaria, on Page 4. We doubt it that you will be surprised byany of the information, but it may provide you with insights aboutyour potential partners, suppliers, clients or competitors. Weapologize in advance that the 10 pages devoted to the IT sectorare, in fact, not much. You can move to movie reviews next, andthen proceed to financial analyses and everything else in themagazine.

For B: You are an outgoing, garrulous person. The best way tostart your Am Cham Bulgaria Magazine 47 is by opening it onPage 18, where Yuliana Boncheva presents the financial frame-work the European Union is considering for Bulgaria's acces-sion. You will be inspired to get in touch with partners and othercontacts, plotting how your business can attract some of theanticipated EU funds in 2007. Immediately after that switch tothe report from Еconomist Conferences and the analysis of ISIEmerging Markets. Once done with those, the rest is up to you.

For C: Your strength is in managing others. Your first reading,accordingly, should be the article You need HR by Mrs. ChristaPleasants Hunter (page 42). Mrs. Hunter's series in AmChamBulgaria Magazine has been among the most attention-grabbingand helpful readings for business people accustomed to stayingat the helm. Your next recommended article is the analysis ofBulgaria's trade unions (Page 24) and, of course, BoykoVassilev's insightful take on Bulgaria-Romania rivalries at thethreshold of the European Union (page 30). Then go to the firstpage and take it from there.

For D: No doubt, the first story you have to read is 2004, thelitmus-test year for tax reform by our business editor, MarinaTsvetkova (page 19). The rest will sort itself out easily.

Have fun.Milen Marchev,Editor-in-Chief

I T s e c t o r

The Second Start of IT Business in BulgariaBy Peter Gavrilov . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Operation Buccaneer . . . . . . . . . . . . . . . . . . . . . . 8Nokia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Protection of Intellectual Property Crucial to Foreign Investment in Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Leading Anti-Spam* Software Manufactured in Bulgaria . . . . . . . . . . . . . . . . 12Electron Progress to Speed Up its Involvement in IraqBy Irina Bacheva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14a n a l y s i s

Brussels gives the money, but will Sofia be able to take it?By Juliana Boncheva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

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2004, the litmus-test year for tax reformBy Marina Tsvetkova . . . . . . . . . . . . . . . . . . . . . . . . 19AmCham Supports Ministry of Financefor Conclusion of TADT . . . . . . . . . . . . . . . . . . . . 22Bulgarian Finance Minister Allowsfor Zero Budget Deficit in 2004 . . . . . . . . . . . . . . . 23

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Bulgarian Trade Unions: from the Barricades to the Privatization Deals . . . . . . . 24Finally a Happy End for BTC privatisation . . . . . . . . . . . . . . . . . . . . . . . . . 28f r o m t h e c o r n e r o f f i c e

Big ad budgets in small Bulgaria? . . . . . . . . . . . . . 29Bulgaria and Romania: Who's Better, Who's BestBy Boyko Vassilev . . . . . . . . . . . . . . . . . . . . . . . . . . 30a m c h a m i n t e r v i e w s

USAID, Bearing Point to Help Improve Commercial LawsBy Irina Bacheva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Italian Business Register is a Highly Organized System . . . . . . . . . . . . . . . . 32Bulgaria Can Lead the Balkans in Reforming Business Registration . . . . . . . . . 33Strong Legal Basis is the Major Factor in Controlling the Commercial Register . . 34a m c h a m e v e n t s

Economist Conferences' Fifth Business Roundtable with the Government of Bulgaria . . . . . . . . . . . . . . 36Emerging Bulgaria to Come Out Internationally . . . . . 38m e m b e r n e w s

The AUBG Business School in Sofia Opens in September . . . . . . . . . . . . . . . . . . . . . 39An International Recognition for the American College of Sofia . . . . . . . . . . . . . 39

2004 - Year of growth! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Domaine Boyar Front Runner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Hebros Bank Launches its Internet Banking with Donation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41You need HR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

n e w m e m b e r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Encouragement Bank AD; ORBIT Ltd. International; Forwarding & Moving; TBOSTEOCENTRE BULGARIA EAD; Rising Force Co.

a r t

American Troupe Finds Success in Sofia With Wagner’s Tristan und Isolde . . . . 45

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A Canopy and a Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

h u m o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

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AmCham Bulgaria Magazine is a primary

forum for political and economic analyses,

news, viewpoints as well as for the presenta-

tion of new business opportunities. The arti-

cles in the AmCham Bulgaria Magazine

express the opinions of the authors and do

not necessarily reflect the position of the

American Chamber of Commerce in

Bulgaria.

Publisher

American Chamber of Commerce in Bulgaria

Business Park Sofia, Mladost 4 Area

Building 2, Floor 6, Sofia 1715, Bulgaria

e-mail: amcham@amcham.bg

www.amcham.bg

Editor-in-Chief

Milen Marchev

Deputy Editor-in-Chief:

Christopher Karadjov

Editors:

Irina Bacheva

Stella Savova

Layout & Design

Milen Marchev

Printed by: BAGRA Ltd, www.bagra.net

Writers:

Boiko Vasilev, Diana Popova, Kalina

Garelova, Marina Tzvetkova, Petio Tsekov,

Peter Gavrilov, Yuliana Boncheva

Advertising

AmCham Bulgaria:

Stella Savova, stella@amcham.bg

AmCham Bulgaria Magazine:

Milen Marchev, marchev@cit.bg

The AmCham Bulgaria

Magazine reaches a broad audi-

ence of AmCham members,

leading US, Bulgarian and inter-

national companies, US and

Bulgarian decision-makers, all

AmChams around the world.

Subscription is free of charge. If

you would like to subscribe to

AmCham Bulgaria publications,

please contact the AmCham

Bulgaria office.

i s s u e 4 7m a r c h 2 0 0 4Contents

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At a first glance, Bulgaria seems to have already enteredthe IT epoch. Even the smallest office in a dingy apart-ment in a residential building somewhere in uptown

Sofia boast at least one personal computer and a printer.However, is that IT? It seems like it really is. It is at least aforegone beginning. The computer and the printer in a smallBulgarian office are still a far cry of the information society, ofthe global village or of some other concept generated todenote the world-wide boom in the sphere of IT. Still, these twodevices are sufficient to connect the people in the small officeto the Internet, and sooner or later these people will becomeaware of the multitude of offers floating around the world andwill start to buy in order to analyze or manufacture.

In practical terms, the start-up of Bulgaria's IT business wassuccessful. The freedom of information and the dynamics ofcontemporary business brought the personal computers, theInternet, the data transfer networks, the mobile phones. As thesector's pundits say, "the terminal units are already in place".The smoothly ongoing current development could easily bedescribed as a "second start", which is related to the rapidpenetration of information technologies in all spheres of live in

this country.

There are several theories that claim to indicate the obstaclesthat slow down the Bulgarian IT business in its efforts toemerge as something dreamed of by all - into the catalyst ofeconomic growth. All theories rotate around as many combi-nations of the terms "state administration", "legislative frame-work" and "investments". A new tendency however has beenemerging over the last two years, namely the efforts of theadministration to initiate the proper measures and to adopt therequired legislative instruments, while investments tend toincrease.

COMMUNICATIONS

The IT sector may be provisionally split into hardware and soft-ware, with communications - internet, telephony and datatransfer - being an integral component. Bulgarian communica-tions are still strongly dominated in all aspects by the BulgarianTelecommunications Company (BTC), mainly because of thefact that the national operator owns a comprehensive and welldeveloped infrastructure covering the whole country.

The Second Star t of ITBusiness in BulgariaBTC privatization will boost the development of communications, will raiseInternet speed and will increase PC and software sales

By Peter Gavrilov

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This infrastructure is mirrored in its most profitable and per-spective aspects by companies like MTel and Globul. The USCableTel also operates parallel channels, reporting to havecommissioned a functional trunk line from Sofia to Plovdiv,with plans to launch a secong trunk line from Sofia to Varnabefore the end of the year. According to its executive director,Ron Finley, CableTel plans to invest some EUR 40 million intwo years.

Legislative de-monopolization of the telecommunications sec-tor and the pending elimination of the monopoly over the socalled last mile (a term used to describe the portion of thetransfer network, which reaches the end users) are expectedto attract new investors.

In some of the segments of this market however the newlydenationalized BTC is facing the competition of companies likeOrbitel, Spectrum Net, Lyrex, Nexcom, MTel (internet servicesproviders and VoIP-telephony); MTel and Globul face virtuallyno competition on the mobile telephony market, where BTCalso primes to emerge. Companies like Neteram CableTel andHungarian PanTel (which, according to some sources, is aboutto enter Bulgaria's market) are gradually emerging as seriouscompetitors in long-distance and international data transfer.

If the BTC is met with competition in its most profitableniches, its first steps would be easily predictable - anincrease of the fees for local calls (where the national tele-com has virtually no competitors) and reducing fees forlong-distance and international destinations, where compe-tition is expected to be much more uncompromising.According to Joanna James, Managing Director of AdventInternational, the new owner of the BTC, another option forraising competitiveness would be the reduction of the num-ber of the company's employees, which are currently esti-mated at some 25,000.

The other possible options include investments for upgradingand digitalization of the infrastructure, so that it would allowlarger volumes of data transfer and broadband Internet access(ADSL) - recently the BTC started offering ADSL to end usersvia existing phone lines.

This market is expected in the near future to perform at amuch higher growth rate, compared to Bulgaria's average GDPgrowth rate, and to generate more than EUR 1.5 billion in annu-al revenue (up from about EUR 900 million in 2002).

The Communications Regulatory Commission release surveydata, indicating that the share of mobile services in 2003stood at 47%, fixed telephony (home and office telephones) -at 45%, and data transfer and dedicated lines - at 7-8%. Thisstructure is about to change dynamically in favour of mobileservices, data transfer and the Internet, while the share offixed-line telephony is expected to shrink to about 35-40%.The number of mobile phone subscribers is expected to riseto some 4.5 million over the next one or two years, up fromthe current 3 million.

NETWORKS

The development of the telecommunication market has a nat-

ural positive impact on the telecommunication equipment sec-tor and on the related services. Virtually all large companiesmanufacturing communications equipment are either directlyoperating in Bulgaria, or are represented by representativeoffices. Companies like Siemens, Motorola, Nokia, Ericssonand others are providing technology services by building net-works operated both by the BTC and by the two mobile oper-ators, MTel and Globul, and are training the personnel appoint-ed to take over the operation of these networks.

Companies like CableTel, which have just started to createtheir infrastructure, must be added to the picture. TheBulgarian branch of Cisco for instance launched the Sofia-Plovdiv trunk line, which was used for a video conference link.The telecommunication equipment market was estimated atabout USD 250 million at the end of 2003. It must be kept inmind however that most of the surveys were based on prelim-inary data and indirect observations and not on directly moni-tored data.

Besides, there are still no consolidated data for 2003. The fallof the US dollar exchange rate resulted in a certain increase,in dollar terms, of the sales of equipment, while most of thecompanies started to quote prices in euro.

HARDWARE

The hardware market also reported an increase, according todata provided by leading companies like Hewlett Packard, Delland IBM and by hardware assemblers and peripherals vendorsknown in Bulgaria as "no name" or "yellow" computers.

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HP tops the list in terms of mobile computers sales, claimingin late 2003 that they expected to report a 50% share of thismarket in Bulgaria. It is a fact that HP is the most active play-er on the computer market and participates in the develop-ment of the "Strategy and action plan for boosting Bulgaria'scompetitiveness on the international ICT markets". Accordingto the strategy, the increasing use of the Internet in Bulgariais directly linked to the volume of computer sales and hasemerged as a major incentive for the increase of this share ofthe hardware market.

Currently some 15% of Bulgaria's population are using theInternet, and the forecasts indicate that this share will exceed30% by the end of 2006, when Bulgaria must be ready for itsaccession to the European Union. Basically, it is difficult toprovide reliable data on sold and installed computers becauseof the fact that some of the importers and assemblers refrainfrom providing data. Still, the number of PC sold in 2003 isexpected to exceed 200,000. The companies buying newhardware to replace outdated units account for a major portionof these sales. Individual segments, like monitors and printers,increase at a higher rate than other components.

SOFTWARE

The software market is, as a whole, the most problematic sec-tor of IT. The share of pirated software is still high (between65 and 75%, according to various estimates), and affectedcompanies claim the Government must make more efforts inprotection of their interests.

The major players on Bulgaria's software market areMicrosoft, Adobe, Corel, Computer Associates and others,which are operating through their local representatives andare naturally trying to expand their market shares. Theirefforts are not directed against the competition but againstthe spread of pirated copies of their software. A lot wasachieved over the last three years. At the business level theissue of software piracy has been resolved, at least in termsof operational systems and office programs. The large per-centage of pirated software - as high as 75%, is due mainlyto the use of illegal software by home users and very smallbusinesses.

The state administration, for instance, is strict in its policy tobuy licenses for the software it is using. Some USD 20 millionwere spent for this purpose for the last two years. This how-ever does not mean that the computers with a legally installedWindows are not used to run illegally copied games. There arevirtually no data about the volume of illegal software outsidethe business software niche. The Pulsar company, which is thelocal representative of world manufacturers of games for gameconsoles like SONY PLAYSTATION, Nintendo and Sega, alsoclaims that there is a serious volume of piracy in this sectoras well.

IMPORT/EXPORT

The Bulgarian or locally based companies, producing softwareproducts dedicated for export, constitute a major item in theIT sector turnover. The technical university graduates and theambitions of the young people to acquire skill in any new

product emerging on the market, is seen as a sound guaran-tee for the success of this sector. Companies like WebGate,Netage, Bianor, WizCom and others, operating in Bulgaria andexporting their products to the world's software markets,account for a major share of the IT financial flows. The allo-cation of additional funds for education, the free distributionof open-source programs, and the high-speed Internet accessare the factors that create the players on this sector of theIT business. Bulgarian programmers have won internationalacclaim by several prominent computer viruses, and thusattracted the attention of many world leaders to their skills.There are more than 30 foreign companies, developing vari-ous software products or components in Bulgaria. The pro-grams dominate the inventory list, but Bulgaria is generatinggood and low-priced textures for computer games (a labour-intensive job which requires the efforts of both artists and pro-grammers), and 3D animation (employing programmers andanimators). Facilities in Bulgaria are used, as stated by thedirector of the Bulgarian office of Tumbleweed in an interviewin this issue, for program testing.

END NOTES

Many readers may find it funny, but Bulgaria lacked a suffi-cient number of fax machines in 1989-1990. The private initia-tive which was unleashed at that time, found itself lacking thethen most popular means for business correspondence.Hundreds of private companies were established within monthsafter the start of the democratic changes, but the importers offax machines were few. There was a genuine deficit whichwas very rapidly resolved by the free market initiative.Currently, the situation is much better. The deregulation of thecommunications market and the fixed schedule for Bulgaria'saccession to the EU came at a time when the terminal units- the personal computers - are abundant on the domestic mar-ket. What remains to be done is to boost the purchasing powerof both the companies and of the end users, so that we couldbecome witness to the second boom of the IT sector. !

A lot of IT exhibitions as BAIT Expo were held in Sofia in the last few years.

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Operation Buccaneer is an ongoinginternational copyright piracy investiga-tion and prosecution undertaken byU.S. law enforcement. On December11, 2001, in a coordinated internationaleffort, the U.S. Customs Service andthe U.S. Department of Justice execut-ed, or caused to be executed, morethan 65 searches in the U.S. and fiveother countries. As of February, 2004,27 defendants have been convicted inthe U.S. of felony criminal copyrightoffenses, including conspiracy to com-mit those offenses. Those convictedhave received sentences of up to 56months imprisonment. These are thelongest sentences ever imposed in theUnited States for Internet copyright pira-cy. Additional guilty pleas and sen-tences are anticipated in the comingmonths.

Copyright infringement, or piracy, as it ismore commonly known, is the unautho-rized reproduction and/or distribution ofcopyright protected works, such as com-

puter software, movies, games andmusic. Pirated digital copies of copy-righted works distributed over theInternet are commonly known as"warez," and those who engage in thisillegal conduct are said to be in the"warez scene." Operation Buccaneer isthe first federal prosecution in the U.S.to successfully target the suppliers,crackers, and leadership of multiple top-

level warez groups specializing in thesupply (aka "release") of new piratedworks to the warez scene. These groupsincluded DrinkOrDie, Razor1911,RiSCISO, MYTH, and POPZ. Additionally,the investigation successfully targetedmembers of several leading "courier"groups that specialize in the distributionand trading of pirated works over theInternet, including the groups

RequestToSend (RTS), WeLoveWarez(WLW), and RiSC. Collectively, thesewarez groups were responsible for ille-gally reproducing and distributing overthe Internet hundreds of millions of(U.S.) dollars worth of copyrightedworks.

Copyright infringement is seriousoffense in the U.S. and most othercountries. In the U.S., copyrightinfringement is a federal crime punish-able by up to five years imprisonmentand a fine of US$250,000. To learnmore about Operation Buccaneer andother Federal piracy investigations, theillegal warez scene, and copyright pira-cy generally, please visit the U.S.Department of Justice Computer Crimeand Intellectual Property Section web-site, at http://www.cybercrime.gov !

Operation Buccaneer

Chart illustrates the steps that "warez" groups follow in releasing pirated software to the Internet.

Organizational chart shows how one warez release group, called "DrinkOrDie," was organized.

International investigation tries to stop illegal software on the Internet

By Jason Gull, Trial Attorney,

US Department of Justice

U.S. Customs Service agentwith over 40 computer servers

seized as part of a raid.

Where has the TETRA network already been completed?

Bulgaria has a state-run TETRA network, started as a pilot project forthe needs of the Border Police National Service of Bulgaria. Some 13percent of the country's territory have been covered so far: Sofia andvicinities, from Vakarel to Dragoman, Vitosha, southwestern slopes ofStara Planina, along with a big chunk of Southeastern Bulgaria,specifically along the border with Turkey. European Union considersthis border troublesome, so the funding from Brussels went there. Aworking TETRA network serves the needs of higher ranks of theMinistry of the Interior (MVR), Border Police command and the bor-der patrols on duty. Thanks to our donation, TETRA is also in use bypatrol cars of First District Police Department in Sofia.

How did you help the police, so they can start using TETRA?

The TETRA network, built with funding from the European Union forthe Border Police, is not utilized to its full capacity. It may serve hun-dreds time more end users, and it's applications have been reducedonly to voice communication, which is just a portion of its true capa-bilities. Because of that NOKIA donated to First District PoliceDepartment in Sofia a mobile information system, based on TETRA,with 12 terminals. System's programming and its connection to thepolice database was done by MVR's communication institute (ICT).Using NOKIA's hardware and servers and MVR programs, any policeofficer on patrol can check in real time the mobile terminal in thesquad car for information about missing persons, stolen automobiles,and the likes. During the first weeks of system's operation, officersarrested several persons declared for nationwide search. The data-base used for TETRA-checks from a portable terminal (which resem-bles very much a regular mobile phone) has been standardized, so itcan be used all over the country.

How long will it take to have TETRA coverage all over Bulgaria?

Technically this should not take too long. Because it is a network forstate use, it suffices to have 100-percent coverage of areas of therespective police, border and other agencies, plus major transporta-tion corridors. The principal question is who is going to pay for that.There are two ways to seek financing. Money can be found from var-ious pre-accession funds of the European Union, such as PHARE orfunds for trans-border cooperation. The government has alreadyapplied for funding. Most probably this money will come in install-ments by 2007, and can be used to expand the current TETRA net-work. On the other hand, funds can be found in the state budget,because has anyway appropriations for the communication needs ofMVR and other agencies. Technologies are improving so fast, that itmakes sense to use more and more of this available funds to acquirenewer and better hardware rather than spend on the maintenance ofoutdated equipment. I believe we should have nationwide coverageby 2007.

What is the data transfer speed using TETRA?

The system is very fast in sending little inquiries and locating theanswer in a huge database. For a person you would enter the IDnumber, for a car - the license plate or engine registration, and thereply will come back from the central base in less than 2-3 seconds.

Besides MVR and other law enforcement, where else TETRA mayprove useful in Bulgaria?

TETRA has been developed as a unified system for the governmentadministration of the European Union. That is, all agency-based net-works that need mobility can switch to TETRA, and many have doneso. Those are parliaments, presidencies, councils of ministers, min-istries of transportation, energy, ecology, health, civil defense, variouscrisis commissions.

It seems that TETRA's role is to replace the current analog radiocommunication with modern digital cellular technology. Can wecall it encoded GSM for the government needs?

For all practical purposes, yes. But we need to distinguish betweenTETRA and GSM technologies because they are often confused.Both are standards for mobile digital communication, but they are verydifferent in fact. TETRA allows for encrypting, 100% protection ofinformation transmitted point to point. It enables the creation of theso-called Virtual Private Networks, independent of each other, butused by the same structure. For instance, we can have 10 agencies,that currently are paying for 10 separate communication systems -with TETRA there will be just one network, which these agencies canuse independently of one another.

Do you want to say that once there has been an initial investmentin TETRA equipment, no other expenses will be incurred? That is,the communication itself, talk and data transfer, is free of charge?

After a TETRA network is built, there are no other expenses relatedto outside operators or outside communication systems, because thisis all state-owned (as long as the communication within the TETRAnetwork are concerned). Simply put, TETRA's operator is the stateitself. This certainly reduces the spending, but also guarantees theintegrity of state-related information. On one hand, TETRA encryptscommunications, on the other, no data has to leave the state-operat-ed system. For all intents and purposes, after the initial investment inhardware and software, what remains are maintenance and electrici-ty charges. Calls within the system are free, and if from a TETRA ter-minal you connect to some outside network - M-Tel, Globul, BTK -there is a provision for a so-called interconnection fee. State busi-ness, of course, can receive preferential pricing from private commu-nication networks. The main idea behind TETRA is to maintain freecommunication between government structures. The provision forconnections outside of the system is left for on-demand needs. Sucha state-run network allows all structures inside to maintain stable,encrypted and free communication. !

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Police Patrols Check Instantly On People, AutosEuropean standard for secure mobile communicationbetween agencies, TETRA, has arrived in Bulgaria.By 2007 all major regions should have coverage,says NOKIA's Krassimir Ganchev

TETRA (Terrestrial Trunked Radio) is the only open digital trunked radio standard

defined by the European Telecommunications Standards Institute (ETSI) which

meets the needs of the most demanding professional mobile radio users and offers

special features for authority use: efficient group calls, ability to prioritize calls and

emergency calls. Data and voice applications are being used in ever more demand-

ing and professional ways by public safety organizations, with new applications

improving efficiency for officers and increasing safety for citizens. TETRA is the only

communication technology that fulfils the most demanding requirements of public

safety professionals, allowing the development of country wide networks that allow

secure communication between different agencies. The networks, such as

GSM/GPRS/WLAN, and their applications may be used to complement the capabil-

ities of TETRA, providing a total solution for professionals.

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Protection of Intellectual Property Rights(IPR) in Bulgaria, has improved sub-stantially during recent years.Legislative reforms have been rapid andsuccessful, the enforcement seems tohave improved, too. Up until 1998Bulgaria was in second place afterChina on the U.S. black list for CD pira-cy (the so- called Special 301). NowBulgaria has dropped to 15th place,according to the statistics from theBulgarian Economy Ministry.

Business Hungary magazine recentlyreported that with the changes in thepolitical system across Eastern Europeand the former Soviet Union commer-cial software piracy became rampant.Hungary has done a lot fighting copy-right violations, bringing its rate of unli-censed software in business use to anestimated 48 percent from 69 percent

in 1996. Even this is behind theWestern Europe's average of 37 per-cent, the magazine said.

The production and distribution of CDsin Bulgaria are regulated byGovernment Decree #87 from 1996.Despite the positive role model present-ed by the Bulgarian government in theIT sector, significant challenges remain,contends the analysis on the IT sectorby Oxford Business Group. Its EmergingBulgaria 2004 saw data piracy as apersistent problem, because there aretoo many people who run servers out oftheir apartments using illegally obtainedsoftware, hampering the development ofa modern intellectual property regime inthe country and hurting software manu-facturers.

Violations of copyright in Bulgaria,

which was a stable trend during therecent years, should be treated as acrime, said Jeffrey Levine, Deputy Chiefof Mission, U.S. Embabassy in Sofia, toparticipants in the IPR conference onFeb. 5, 2004. Some 130 participantsfrom the executive and legislativebranch, and businessmen gathered inSofia's Hilton for the forum, organizedby AmCham. Commercial LawDevelopment Program supported theconference along with AmCham mem-bers Microsoft and TechnoLogica.

The one-day conference discussed therole of IPR as a crucial prerequisite forattracting direct foreign investments inthe IT sector, public and private accessto digital information, production andtrade in optical CDs and the variousimplications of copyrights violations.According to Mr. Levine the Bulgariangovernment is taking serious steps tocombat piracy, but the challengesremain.

Valeri Dimitrov, Chairman ofParliamentary Economic PolicyCommittee, said an adequate protectionof intellectual rights in Bulgaria isurgently needed because copyright vio-lations are still not treated as a majorcrime. He expects that in March 2004the parliament will pass the Law forAdministrative Regulation of Productionand Trade in Optical CDs. The draft ofthe bill envisages fines up to 50,000Leva for the unlicensed CD manufac-turing.

Case studies from Bulgarian legal prac-tice presented at the conferencedemonstrated that just increasing fineswill not suffice unless there is a persis-tent effort at enforcing them. In 1990,approximately 90 percent of CDs soldin Bulgaria were counterfeit, but now

Protection ofIntellectual Proper t yCrucial to ForeignInvestment in Bulgaria

The protection of copyright in Bulgaria remains a challenging issue, in the opinion of Valeri Dimitrov,Chairman of Parliamentary Economic Policy Committee

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that share has been reduced to 60 per-cent, according to data from the lawenforcement agencies.

Deputy Minister of Economy ValentinParvanov and the Chairman of ForeignInvestment Agency Pavel Ezekiev dis-cussed practical aspects of the IPRprotection and how stronger copyrightprotection makes the country moreattractive to foreign investments.

Jason Gull of the U.S. Department ofJustice, Michael Smith of U.S. Patentand Trademark Office, PanagiotisDouvis, Regional Director in theCustoms Office in Athens, made panelpresentations as well. Jason Gull talkedabout a large U.S. investigation knownas Operation Buccaneer, which lasted14 months and tracked pirate sites dis-tributing illegal software. A discussionon what makes the enforcement

process difficult in Bulgaria involvedDebra McFarland, Mission Director,USAID and Carol Frausto, U.S.Commercial Law Development Program(CLDP). Both pledged further assis-tance to enforcement efforts in Bulgaria.As a first step in that direction AmChamand CLDP agreed to organize a seminarfor South Eastern Europe judges andprosecutors in September or October2004 in Bulgaria. !

Microsoft General Manager Teodor Milev speaking with Chairman of Foreign Investment Agency PavelEzekiev.

The issue with illegal software use in Bulgaria has escalatedbeyond protecting the interests of software manufacturers anddistributors; it is not even an issue of improving the image ofour country. Now our main goal is to protect the rights of ourlegal users. Many Bulgarian companies made substantial (fortheir scale) investments and licensed their software. If nowthe efforts of government institutions and NGOs, who startedthe fight against illegal software, subside, legal users will findthemselves in a disadvantaged position, because their com-petitors can use pirated software at no cost.

Legitimate users will not only start to question the rationalebehind paying for software licenses, but their motivation to dothings "the right way" in general will weaken. It would be dis-astrous if some companies start to feel "punished" for takingthe step towards legal and legitimate business.

TechnoLogica's CAD/CAM center DiTra is an exclusive distrib-utor for Bulgaria and Macedonia of the world is leadingmachine design software SolidWorks. For eight years, we haveworked to establish this product in our market. We have set upa user group for exchange of experience and knowledge, aswell as display of professional achievements. We assist ourclients by helping them be listed on the Manufacturing Network- an international work opportunities portal. Currently we are

printing the second issue of our study book in Bulgarian.

We develop and share free of charge additional software pro-grams for specific needs or clients. We started an initiative,together with 14 other companies, that would bridge the gapbetween technical education and business requirements bydonating to five leading universities software licenses for over$2 million (commercial value worth), study materials and train-ing aids, providing internships to select students, and so on.

Our product has long been a leader in Bulgaria, but legal useis not more than 10 percent. Amazingly enough, among "ille-gal" users there are some well-known foreign investors.

Until recently, TechnoLogica focused primarily on stimulatingdemand by creating value for legal users. However today legalusers require from us an even stronger stance against illegaluse. A new trend is emerging - engineers employed by illegalsoftware users seek our help in convincing their managementto license the product. Their main incentive is to be able touse our services and support. The benefits of this software areeasily measurable and management can calculate in howmuch time licensing will pay off. If only there was enough stim-ulus and understanding, that legalization is beneficial andinevitable. !

TechnoLogica Protects the Rights of Legal UsersOgnian Trayanov, President, TechnoLogica:

How did it happen that Tumbleweed Communications cameto Bulgaria?

We have been growing our software development presence inBulgaria over the past three or four years. In the beginning, wesubcontracted some tasks to a Bulgarian software develop-ment company. We started this effort with 3 developers, andgrew it to more than 10 people by the end of 2002. In August2003 we opened a Tumbleweed-owned branch office in Sofia,and we've grown our staff to 55 people are working forTumbleweed Communications here. Why Bulgaria then -because it is a country with traditions in software projects, withmany creative people. It is a good choice, sort of natural, aspeople here know how to do things. It is a known fact thatsome of the most popular computer viruses have been creat-ed by Bulgarians, which suggest the availability of excellentprogrammers.

When we were looking forward to opening our next non-U.S.office, we considered China, India, Vietnam, Bulgaria andUkraine. All these countries have traditions in software devel-opment. In the end we chose Bulgaria, because of the stablepolitical situation, time-zone difference, abundance of skilledlabor and good overall perspectives for growth. The TechnicalUniversity in Sofia is excellent in training specialists, people arewell-educated, and the country is on track to join the EuropeanUnion.

Where are your other branch offices located?

Our company is headquartered south of San Francisco,California, in Silicon Valley, with regional sales offices locatedthroughout the United States. Tumbleweed Communicationshas a European headquarters office in London and is repre-sented in Tokyo. In addition, the company has two officesdevoted to software development, one in Sofia and the otherin Bangalore, India.

Tumbleweed sells software to make Internet communicationsmore secure, reliable and automated. The company's emailfirewall, secure file transfer, secure email, and identity valida-tion solutions help customers significantly reduce the cost ofdoing business. In particular, the Tumbleweed Email Firewallprotects, filters and secures email traffic at the Internet gate-way with an integrated set of anti-spam, anti-virus, anti-hacker,content filtering, email relay, encrypted messaging, and emailauthentication capabilities. This is a highly competitive market,and Tumbleweed is one of the worldwide leaders in this space.As part of the Email Firewall, we also boast one of best anti-spam solutions in the world.

Tumbleweed's Bulgarian office is a significant part of the suc-cess of the company's products. In fact, the anti-spam mes-

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About TumbleweedCommunicationsTumbleweed is a leading provider of secure Internet mes-saging software products for enterprises, financial servicesorganizations and government. By making Internet com-munications secure, reliable and automated, Tumbleweed'semail firewall, secure file transfer, secure email, and iden-tity validation solutions help customers significantly reducethe cost of doing business. Tumbleweed products are usedby millions of end-users and tens of thousands of corpo-rations. Tumbleweed customers include ABN Amro,Catholic Healthcare West, Bank of America Securities, JPMorgan Chase & Co., The Regence Group (BlueCross/Blue Shield), Society for Worldwide InterbankFinancial Telecommunication (SWIFT), St. Luke's EpiscopalHealthcare System, the US Food and Drug Administration,and the US Navy and Marine Corps. TumbleweedCommunications was founded in 1993 and is headquar-tered in Redwood City, California. For additional informationabout Tumbleweed go to www.tumbleweed.com

Leading Anti-Spam* SoftwareManufactured in BulgariaOur company is growing, and we like the software skills and expertise we findwith Bulgarian programmers, says Eric Dumas, General Manager of TumbleweedCommunications - Sofia

*Spam - unsolicited e-mail, often of commercial nature (ads),sent indiscriminately to multiple mailing lists, individuals, ornewsgroups.A.k.a., junk e-mail. This meaning is probablyinspired by a comedy routine from Monty Python's FlyingCircus, in which the word Spam is repeated incessantly.

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sage processing software for Tumbleweed is developed inBulgaria, by Bulgarian programmers. In addition, we do testingfor all of Tumbleweed's products, including the TumbleweedEmail Firewall and Tumbleweed Secure Redirect . Don't forgetthat testing and quality assurance is probably the most sensi-tive part of software development.

Which companies use your software? Who are your poten-tial clients?

We develop software for large enterprises around the world,where the protection of electronic correspondence is a high-priority task. The company targets Global 2000 companies,and currently has over 700 enterprise customers. In particu-lar, we have a very strong presence in the financial servicesindustry, healthcare, and government. For example,Tumbleweed has over 100 customers from the financial ser-vices industry, including 9 of the top 10 US banks and 5 ofthe top 6 European banks. And the company has had somevery significant customer wins recently, including companiessuch as Wal-Mart, General Motors, AXA, and BoehringerIngleheim.

It seems that you are satisfied with your achievements inBulgaria. Are you planning an expansion to your operationshere?

We are currently planning to increase our software develop-ment footprint here, although we don't plan to expand our sales

capabilities any time soon. Right now we are looking to hirespecialists in software engineering, programming, support engi-neering, etc.. We are also in need of people who have provenskills in software testing. In the last month, we have alsoopened a Technical Support section, and this team is workingas part of our Global Support organization. Those positionsrequire a lot of investment and training for us. We are likelyto keep growing to support these different areas, and I esti-mate we will add 10-20 people this year. So in a nutshell - weare increasing our business in Sofia. !

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Mr. Dresch, what are the first tasks you are going to startwith in Electron Progress? Does the company need mod-ernizing?

In fact, the company is continuing to modernize; it is an ongo-ing process since the firm was privatized in 2002. The goodthings I am always stressing are the obtained internationalcertificates: ISO 9001: 2000 and AQAP2110, extremely impor-tant for NATO accession. All of them are also connected withthe company growth. The question is to extend our businessopportunities. We would stay in the field we are good, so far,but we are also looking to the adjacent markets, where toapply our high-quality skills. As a new manager here, I amrather impressed by the skills Electron Progress has. It isencouraging. I have already had many discussions with theemployees, trying to find out what are their goals, what arethe things that are slowing them down, how would they seethe growth. They have to feel they are part of the company,not just waiting for the paychecks. We are giving a careergear. In March and April, I am going to talk more and morewith my employees. They would see a different style of man-agement.

Is your company going to be the sole contractor with theBulgarian Defense Ministry in placing the army equipmentin compliance with NATO military standards?

The certain answer is no. Electron Progress is one of thepartners. The Ministry of Defense (MoD) is working also withlarge US companies, like Northrop Grumman, who are

expanding their command center here, and Lockheed Martin.I will not mention names, but there are other Bulgarian com-panies supplying certain parts. We would like to be the con-tractor of choice now. Together with the MoD we set up steer-

Electron Progress to Speed Up itsInvolvement in Iraq

A feedback from employees is indispensable to managers, says Thomas Dresch, Managing Director

By Irina Bacheva

Electron Progress to Speed Up itsInvolvement in Iraq

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ing committees, consisting of people from MoD and ElectronProgress. We need people from both sides with the authorityto make recommendations. We have a good chance of suc-cess. On one side, we have more knowledge that is technicaland, on the other side, the MoD has more operational knowl-edge. In the United States, these committees are known as"integrated product teams."

One of your new projects envisages partnerships in Iraqwith foreign companies. Which companies are you goingto contact?

Harris Corporation was the first, dealing with radios. It was alogical step since the Bulgarian troops are familiar with Harrisradios. In 10 days, I will be in the United States, participatingin the negotiations with Harris about the further involvementof Electron Progress in Iraq. Doing this type of work, we wouldbe quickly recognized as a leader in the countries that wereat war.

Could you be more specific about Electron Progress' keyproject to develop positioned digitized communication sys-tem for the Bulgarian Ministry of Defense?

It is an ongoing project, called Strandja, we are under con-tract now. This is really a national program for the MoD andthe equipment had already been ordered. It is my conviction,we have to maintain a very aggressive schedule to be able tocomplete the project. It is developing well; we are working withAlcatel, which is the largest supplier of the equipment, HarrisCorporation, Cisco Systems, Microsoft and HP.

What is your deadline?

End of the year. In March, we would see the first set of theequipment installed.

What is this system designed to do?

It is the backbone of the army. Its aim is a complete com-munication system within the country. The military would beable to share data, voice, video and telephone systems. Partof this network will be used in the national integrated surveil-lance system on the Black Sea Coast, which is a new pro-gram. When Bulgaria becomes a NATO member, the Blacksea will be a new NATO border. Therefore, it is very importantthat it is protected. MoD is trying to get a memorandum ofunderstanding in place with Lockheed Martin to give somedetailed definition of the entire project. It is a joint project, itis not just a MoD project, but it brings together the MoD,Ministry of the Interior, border police, customs. !

Thomas Dresch is the new Managing Director of Bulgarian ElectronDepartment of Radar Systems (1997-2003). He also headed the businessdevelopment department at the company and managed the exploitation ofnew markets for its Vessel Traffic Management system. Mr. Dresch hasworked also for General Electric's Ocean and Radar Systems and MartinMarietta. He started his career as research programmer, graduating fromSyracuse University with a master's in mathematics.

The Electron Progress Chairman of Supervisory Board Georgi Krumov address-es the guests during the party.

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The European Commission proposedthat Bulgaria receive 4.252 billion Euroin the first three years after joining theEuropean Union. The government inSofia said the offer was very generousand Bulgarians understood they wouldreceive 463 Euro "per capita". It wasalso explained that the $2.3 billionprovided for "infrastructure and envi-ronment" will suffice for the construc-tion of 660 km of highways, 1,816 kmof first-class roads, 1,299 km of rail-roads, 192 large water-purification sta-tions or 260 dumpsites for householdwastes.

However, the EC calculations - called"financial package for Bulgaria andRomania for the period 2007-2009" - arejust a tentative framework, which is yetto be approved by the European Union(in the spring) and the EuropeanParliament (the discussions will contin-ue for months). The financing envisagedfor Sofia and Bucharest is just a smallpart of the huge draft budget of thecommunity for 2007-2013, which is anissue of heated debates among theEU's 15 current members. Germany forinstance, which is the biggest contribu-tor to the common European treasury,has an increasingly active lobby thatbelieves it is high time Berlin stoppedsustaining the poorer members. So thegenerosity announced by Brussels is notquite certain yet.

Another uncertainty is related to Sofia'sability to utilize the funds, once it getsaccess to them. That requires well-pre-pared projects that can easily win themoney offered in the financial frame-work. Bulgaria is receiving presents incash from the EU in order to restructureits agriculture, improve its infrastructureand strengthen its administration.

Although the amount is just 300 millionEuro to 350 million Euro a year, a goodpart of it remains in Brussels' cashboxbecause Bulgaria is not proposing pro-jects that are good enough to win thefinancing.

To prepare for membership, Bulgariaand Romania are receiving financialsupport from the EU through the PHAREProgram, the Instrument for StructuralPolicies for Pre-Accession (ISPA) andthe Special Accession Program forAgriculture and Rural Development(SAPARD).

In 2001-2003 Bulgaria stands to receivean average of 307 million Euro a yearfrom the three funds. If the degree ofutilization is good, Sofia and Bucharestcan rely on more appropriations in2004-2006.

Given the current aid utilization rates,the financial package suggested byBrussels for the two future members ofthe EU (Bulgaria and Romania hope tojoin in 2007) looks quite "thick".

So, the question is whether 4.252 billionEuro is too much for Bulgaria and what

Payoff

Brussels Gives theMoney but Will Sofia Be Able to Take It?The 4 billion Euro slated for post-accession Bulgaria may be cut or left unused

By JulianaBoncheva

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this kind of money can actually buy thecountry?

Agriculture support

Bulgaria will receive 388 million Euro formarket measures in agriculture. Theseconcern mainly acts of state interfer-ence aimed at supporting or curbing theprices of certain sensitive goods, suchas milk, sugar, wheat, etc. The calcula-tions are based on the latest marketforecasts. The European Commissionproposed a three-year financial packagefor market measures in agriculture total-ing 1.12 billion Euro for Bulgaria andRomania (388 million Euro for Bulgaria,732 million Euro for Romania).

The direct payments to farmers inBulgaria and Romania can reach 1.312billion Euro in the first three years afteraccession (431 million Euro for Bulgaria,881 million Euro for Romania). Theseamounts will be paid to farms depend-ing on the land they own and regardlessof the quantities they produce.According to Bulgarian Minister ofAgriculture Mehmed Dikme, small farmsin Bulgaria will be able to receive 1,000to 1,200 aid packages a year.

Some 3.04 million Euro should gotoward development of the rural areas inthe first three years: 617 million Euro forBulgaria and 2,424 million Euro forRomania. The distribution takes intoaccount the relative shares of the uti-lized agricultural area and agriculturalemployment in both countries. Theamounts will be used for financing vari-ous projects for improving country roads,electricity and water supply, telephones,dumpsite construction, and so on.

Structural actions

This part of the financial package for2007-2009 includes appropriations forlarge infrastructural and environmentalprojects. For the three years afteraccession Bulgaria and Romania shouldreceive 8,273 million Euro for structuralmeasures: 2,300 million Euro forBulgaria and 5,973 million Euro forRomania. This financing will be agreedwith the European Union's rule thatamounts cannot exceed 4 percent ofthe gross domestic product of therespective member state. Given the factthat the two countries are not best per-formers in the utilization of European

funds, the financing is envisaged toincrease gradually from 2.4 percent ofGDP in 2007, to 3.2 percent in 2008and reach the maximum 4 percent ofGDP in 2009.

Internal policies

The EC believes that 1,012 million Eurohas to be earmarked to Bulgaria andRomania for that purpose. This includesamounts for border strengthening, forbuilding a competent and efficientadministration. The financial packagealso includes the Nuclear Safety topic.

As much as 200 million Euro has beenalready committed under the PHARE tothe decommissioning of installations atthe Kozloduy nuclear power plant for theperiod 2000-2004. The EC now sug-gests an additional financial support ofEUR 350 million for the 2004-2009 peri-od. Of this amount, some 140 millionEuro has to be provided by the end of

2006, before Bulgaria joins the EU.Therefore the amount will be fundedunder the PHARE. The remaining 210million Euro will be included in the finan-cial package for 2007-2009 at a rate of70 million Euro a year.

Institutional strengthening

The successful implanting of Bulgariaand Romania in the EU is cruciallydependent on the capacity of theadministration and the judiciary to guar-antee the application and protection ofthe common European law. ThereforeBrussels suggests that Bulgaria andRomania receive additional financialsupport for institution building measures.The amount proposed for the two coun-tries is 82 million Euro. Both the facilityfor institution building and the supportfor the Kozloduy Nuclear Power plantwill be discussed and specified duringthe negotiations on the Other MattersChapter.

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Budgetary compensation

No specific amounts are earmarked.Financing will be commented if neces-sary, i.e. if after accession into the EUthe new member state finds itself in abudgetary position which is worse incomparison with the situation beforeaccession.

Administration

After joining the EU, Bucharest andSofia will have to cover a substantialincrease in administrative expenditure:e.g. with respect to increased interpre-tation and translation needs. ThereforeBrussels has projected an estimated346 million Euro in the 2007-2009accounts.

Pre- and post-accession EU funds(% of GDP, Intellinews estimates)

Sofia and Bucharest:active observers in theEuropean Parliament

The European Commission suggestedthat Bucharest and Sofia receive activeobserver status in various Europeaninstitutions, including the EuropeanParliament.

If the financial package for the accessionof Bulgaria and Romania needs to berevised after finalization of the talks, aprocedure should be available to involvethe two countries in the decision-makingprocess. This can include an informationand consultation procedure.

The expenditure on structural actions,rural development and some aspects ofinternal policies proposed by the ECmake up about three-quarters of the totalfinancial package. This ratio should bepreserved. Certain adjustments are pos-sible within the national allocation but thetotal amount will be probably preserved.

Besides the European Commission, theEuropean Parliament is also a key factorin the financial relations with Bulgaria. It

is very likely that when MEPs begin dis-cussions on the future European budget(for the 2007-2013 period) Bulgaria andRomania will have already finalized theaccession talks. Therefore the ECbelieves that Sofia and Bucharest shouldbe given opportunity to cooperate moreactively with the European Parliamentwith respect to the proposed financialpackage for the two countries.

In the end it turns out that Europe hasdone its best to propose good financialparameters to Bulgaria and Romania,but whether they will receive all that hasbeen promised will depend on the effortsof the two countries in the comingmonths and year. These will be mainlyefforts to create projects that deserveEU financing, diplomatic efforts in thecooperation with the EuropeanCommission and the EuropeanParliament and efforts to popularize theinevitable changes that Bulgaria's adop-tion in the EU will entail.

Dampening the enthusiasm

There are a few factors that shoulddampen Sofia's initial enthusiasm aboutthe generous financial package.

# The promised "cornucopia" actuallyillustrates the sad fact that Bulgariaand Romania are the poorest futuremembers of the EU, so they deservemost aids. The two countries' GDPrates are just 27 percent or 26 percentof the EU average. Bulgarians'incomes are four to five times lowerthan the European ones. In terms of

labor productivity and competitiveness,the two countries also lag far behindEurope.

# As member of the EU, Bulgaria will notonly receive money but will also givemoney. After 2007 Sofia will pay con-tributions to the EU, which will amountto some 800 Euro to 900 Euro millionfor the first three years of accession.

# Bulgaria has no adequate experiencein the administration of large financialflows and developing quality invest-ment projects. With its clumsy admin-istration and low-quality projects,Bulgaria will hardly "earn" 100 percentof the envisaged funds. The poor uti-lization of the pre-accession fundsgives ample reasons for concern.

# Sofia does not yet have a strategy forthe most sensitive sectors of theeconomy, those that will be affectedmost by the EU accession, e.g. thesmall farms, the enterprises in thefood and beverage industry and theproductions that do not meet theEuropean environmental standards.

# It is also uncertain whether the statewill be able to provide the so-calledsupplementary financing to the gen-erous European aids. The principlesof European financing require that thebeneficiary country should also par-ticipate, though with smaller amounts.Therefore Bulgaria will have to projectconsiderable amounts for supple-menting the EU aids in the comingyears. Will it find the necessaryresource? !

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The Economist magazine published dur-ing the pre-election summer of 2001 aspecial report predicting positive perfor-mance of Bulgaria's economy over thenext two years. The oracles from theanalyses and forecasts department of theauthoritative publication wrote that theyexpected a stable gross domestic product(GDP) growth of a notch below 5 percent,a drop in unemployment from 17 to 15percent, and that inflation would drop to4.4 percent, almost half of the then cur-rent 8 percent. The report claimed thatthe budget deficit of the governmentwould level out while the external debt ofthe country would increase insignificantlyby about $ 400 million.

The macroeconomic achievementsreported today by the Bulgarian govern-ment indicate that the forecasts madeby the Economist were as accurate asthey could be.

Fiona Mullon, senior analyst with theanalyses department of the Economistwas quoted at that time as saying:"There are inconsistencies in the eco-nomic platform of the Movement ofSimeon II. It has promised to ease sub-stantially the tax burden and reducebudget deficit as well as an explosivegrowth of the economy. It is obvious thatit will be difficult to implement all thesethings simultaneously." For the timebeing, the team of Finance MinisterMilen Velchev is managing pretty wellthe process of tax reduction, althoughthe rates are lower than promised.

THE HERITAGE

The fiscal heritage received by theNational Movement Simeon II (NMS)was strongly reminiscent of the years ofplanned socialist economy. The stateused to spend for its budget expense

some 40 percent of the GDP. At thattime the companies with an annual prof-it of more than 50,000 Leva were pay-ing a 28 percent profit tax. Ordinary tax-payers paid between 20 percent and 38percent in income tax. Each Bulgariantaxpayer paid some 42 percent ofhis/her income for social insurance,whereas the maximum income, used tocalculate the installments was set at850 Leva. That meant that even in casea person received 2,000 Leva permonth, he was paying for a pensionbased on a salary of 850 Leva, in a vainhope to retire by the standards of theEuropean Union, whose memberBulgaria will become in 2007.

THE PROMISES

The Government approved in May 2002its budget forecast for 2003-2005, inwhich the main accent was placed onreducing tax and social insurance bur-dens. The main concepts in the docu-ment were linked to creating incentivesfor investments, the preservation ofmacro-economic stability and the main-tenance of a low budget deficit and sus-tained economic growth. The tax reformhinged to a gradual transfer of the bur-den from direct taxes - profit tax, incometax, etc. - to indirect taxes like exciseduties and value-added tax (VAT). Thecomprehensive strategy of the cabinet ofSimeon II and of Finance Minister MilenVelchev was submitted for public debateand tied to a specific schedule. Thestrategy included first of all amendmentsto the Income Tax Act, aimed at reduc-ing the taxes levied on persons in thelowest income bracket from 18 percentto 15 percent in 2003 (which is alreadyeffective), and another reduction from 15percent to 12 percent in 2004. Incometax paid by Bulgarians is expected to fallto 10 percent in 2005. The income min-

2004, the Litmus-TestYear for Tax ReformTaxes failed to go down as the government had promised, but a positive resultwould bring a tangible relief in 2004

By MarinaTsvetkova

"Taxes are paid out of the sweat of every working human. If these taxes are excessive, they are manifested by silent factoriesand empty farms sold out due to unpaid taxes, and by mobs of hungry people wandering in the streets in search of a job."

Franklin Roosevelt, Pittsburg, October 19, 1932

2 0 0 0 t a x r e l i e f m e a s u r e

# Reduction of the corporate tax rate from 23,5 percent to 19.5 percent # An increase of the tax-exempt income threshold from 110 Leva to 120 Leva # Reduction of the tax rate for the lowest income bracket from 15 percent to

12 percent # A lowering of the VAT registration threshold from 75,000 Leva to 50,000 Leva # A new scheme for categorizing of settlements for the purposes of patent tax,

which will result in a reduced patent tax for various types of commercialactivities

# VAT relief for deliveries to projects financed directly by donations made incompliance with international agreements

# Amended tax regime applicable to insurance companies. The proposals is toshift to the general provisions of the Corporate Income Tax Act, with an addi-tional 3percent tax on insurance premiums

# Amended tax regime applicable to the commercial operations of budget-sub-sidized enterprises. The proposal is to introduce a batch 4percent tax on therevenue from commercial operations.

# A reduced tax rate of 15 percent, down from 20 percent, applicable to dona-tions made in favour of the Bulgarian Red Cross, medical and healthcareestablishments, orphanages, disabled persons'facilities etc.

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imum exempt from tax is targeted tobecome 120 Leva in 2004 and 130 Levain 2005.

The government made also a promiseto draft a three-year program foramendments to the patents tax frame-work. The finance ministry proposed toadopt in 2003 a unified profit tax rate of23.5 percent (which is also alreadyeffective) and to eliminate municipaltax. It was planned that as of 2003 allprofit tax revenues would be paid exclu-sively to the state budget, and themajor portion of the income tax - to thelocal budgets (one more promise thatwas fulfilled).

It was also proposed, with the objectiveto provide incentives to investments, toeliminate the tax on dividends receivedby a foreign company in case it ownsmore than 25 percent of the equity cap-ital of a local enterprise. Additional taxincentives were tied to opening new jobsin regions with a high unemploymentrate. Other measures included theacceleration of the depreciation rate byincreasing the effective levels in order toboost investments in material assets.

The annual depreciation rate for com-puters and software was raised from 20percent to 50 percent; for machines,production installations, motor vehiclesand equipment - from 5 percent to 10percent. Besides, the tax levied ontransport vehicles was to be trans-formed as of 2004 into road-usagecharge.

Excise duties policy was another majorelement of the 2003-2005 program. Theproposed amendments to the ExciseDuties Act eliminate of excise duties onwine and raise the excise duties on spir-its from 0,035 Leva to 0.05 Leva peralcohol degree. The excise duties on fil-ter cigarettes were raised as of 2004from 0.002 Leva per cigarette plus 40percent of the retail price to 0,003 Levaper cigarette plus 42 percent of the retailprice. The targeted increase of theexcise duties levied on leaded gasolinewas set at 50 Leva per ton.

THE RESULT

Most economic analysts share the thesisthat the promised tax revolution failed tomaterialize in 2003. At the same time

however the analysts recognized that thegovernment did not deviate from themeasures set out in the 2003-2005 pro-gram.

The most substantial tax reduction in2003 was related to the income tax onthe bottom income bracket - from 18percent to 15 percent. The highest taxrate of 29 percent became applicable tomonthly incomes of more than 600 Leva,down from 1,000 Leva. Medical doctorsand notaries were excluded from the listof occupations eligible to report incometax returns as small businesses. Thelowest income exempt from tax remainedset at 110 Leva. The advance tax rate of20 percent paid by small businesses andvarious free-lancers also remainedunchanged. All told, as a result of thechanges in the income tax framework aperson with a gross monthly income of150 Leva was able to save, after socialinsurance installments, a token 0.73Leva in taxes.

The Government eliminated the absurdpatent tax of 5 Leva per square meterof the area used by commercial outlets.

Continued from page 22

Bulgarian Tax Inspectors during routine check at „Ilientzi“ Market. Most of the small traders in Bulgaria try to avoid taxpaying in general.

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b u d g e t a l t e r n a t i v e s

The Institute of Market Economy (IME) proposed in late2003 an alternative approach to the state budget for 2004.The key proposals were to drastically reduce - down to 10percent - the profit tax and the income tax, coupled to areduction of social insurance payments to 16.7 percent.According to IME estimates the reduced taxes will not affecttreasury revenues while it will boost economic growth. Inorder to achieve a balance of expenditure, the finance min-istry should simply cut inefficient spending by the adminis-tration. This approach would restore the fair allocation ofpublic finances.

IME's calculations indicate that as many as 2.2 millionBulgarians, or 33 percent of the people above the age of15, are generating an income by working either in the pri-vate sector or in the state-owned enterprises. The remaining67 percent are actually receiving somebody else's moneythrough the treasury. The group of consumers includes theadministration, the unemployed, the students, the pensionersetc. According to government estimates, some 11 millionLeva must be credited to the treasury as taxes in 2004. Thenominal share of a single income generating" person in pro-viding funds for social activities is estimated at about 2,800Leva. The total amount, redirected through the treasury, isset at 6,529 million Leva - 5,641 million Leva for social insur-ance purposes and 618 million Leva for government subsi-

dies. In addition, working people allocate between 10 percentand 20 percent of their income for supporting their childrenor relatives, who are in a depressed economic situation.According to the IME recommendations, the reduction of thetaxes was seen at the only reasonable measure that thefinance ministry could initiate in case it is genuinely com-mitted to stimulating economic growth and improving livingstandards. Reducing the profit tax to 10 percent would boostinvestments and stimulate companies' development. A 10-percent personal income tax would result in a substantialincrease of incomes - for instance a monthly salary of 235Leva now would rise to about 300 Leva, or by about 25 per-cent. This will release assets into the economy - some 2.16billion Leva, which amounts to one third of the expenditurefor personal consumption as specified in national accounts.

The reduction of taxes would naturally result in reducedincome to the state budget, hence the recommendation tostart cutting on state expenditure. This would imply painful,from a political point of view, cuts in the 440,000-strongarmy of budget employees. Serious cuts could be made inthe allocations used to support the administration - externalservices, fuels, telephone fees, current repairs. Savingsshould be made also from subsidizing loss-making opera-tions and from the cost for acquisition of long-term materi-al assets. !

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The Minister of Finance Milen Velchev, Deputy MinisterStamen Tasev, Chief Tax Director Nikolai Popov met on Jan.28 with AmCham Board of Directors and members of theAmCham Finance Committee to discuss the assistance of theChamber in the negotiation of the U.S.-Bulgaria Treaty onAvoidance of Double Taxation (TADT).

AmCham will support the Bulgarian Ministry in launching andsuccessful conclusion of the treaty negotiations. The Chambercooperated with the Finance Ministry for an in-depth analysisof current tax legislation, which will be sent to the Treasury inMarch.

The member companies Ernst & Young, KPMG, Deloitte &Touche and Borislav Boyanov & Co. arranged the analysiswithin the Finance Committee of the Chamber. The papers areexpected to facilitate the successful negotiations between the

Bulgarian Ministry of Finance and the U.S. Department ofTreasury.

The Chamber clearly stated that the conclusion of such atreaty is essential and responds adequately to the U.S.investors' interests here. Substantial support from AmChammembers and other U.S. companies for the treaty will relievethe tax regime on the companies' revenues and personalincome taxes of residents in both countries.

AmCham demonstrated its interest in cooperation with theMinistry of Finance also in supporting Bulgaria's tax reforms.The Ministry of Finance looks favorably at such involvementand invited AmCham Finance Committee to participate in thework of the National Tax Advisory Council of the Ministry. As afirst step, the Chamber will actively participate in the discus-sions of the draft of the Fiscal Investigations Service Law. !

AmCham Supports Ministry of Finance for Conclusion of TADT

The tax levied by the number of employ-ees however remained. Its rate waseven increased by 100 percent with theemployment of each new worker.Representatives of the business com-munity are adamant that these mea-sures are far from providing incentivesto employment. A zero tax rate wasintroduced for companies in municipali-ties with a high unemployment rate. Asimilar tax incentive was not approvedfor sole traders and family businesses inthe same regions.

The profit tax rate was set at 23.5 per-cent for 2003, but with the introductionof a unified corporate tax rate the moneywill be paid directly to the state budget.

The promised transition from direct toindirect taxation was also delayed. Thefinance ministry set its target for directand indirect tax revenues to the trea-sury at 30.2 percent and 13.1 percent,respectively. The VAT rate remainedunchanged at its previous level of 20percent. However, the VAT registrationthreshold was lowered from 75,000Leva to 50,000 Leva, which resulted ina larger number of companies obligedto pay VAT. The companies were alsoobliged to open a dedicated VAT bankaccount and to transfer all VAT-relatedamounts exclusively through thisaccount. A new scheme was introducedfor the accrual of VAT in case of invest-

ment projects for more than 10 millionLeva, allowing importers to releaseturnover assets within a shorter periodof time by accruing VAT themselves.The excise duties on fuels and alco-holic beverages were increased and willbe raised further. Financial expertsexpect that this will raise the prices ofalcoholic beverages by 43 percent, ofgasoline - by 33 percent, and of dieselfuel - by 91 percent. The increase ofthe excise duties on tobacco productswas put off for 2004.

THE IMPACT

All these promises, either kept or not,had a direct impact on the state budget.The economic growth target is set at 5.3percent at a target deficit of 0.7 percentof the GDP and an average annual infla-tion of 4 percent. According to govern-ment estimates, the projected expensesguarantee the success of the reforms incrucial sectors - the judiciary, thehealthcare system, and education. It isalso true that in nominal terms thehealthcare budget for 2004 wasincreased by 15.1 percent compared to2003, and the budget for education wasincreased by 16.3 percent. The alloca-tions to the judiciary system increasedby 44 percent. It would seem somewhatsuspicious that spending has beenincreased while taxes are expected tobe reduced. The decrease of the cor-porate tax alone by 4 percent would

mean a decrease of 150 million Leva ofthe budget revenue. In this specific casehowever the government relies onBulgarian businesses to utilize theassets released as a result of lowertaxes for investments and for creatingnew jobs.

Reduced income tax will lower the 2004budget revenue by another 60 millionLeva. This measure was used by gov-ernment financiers as a motive in sup-port of their claims tax policy hasacquired a strongly manifested socialaspect over the last two years.Nevertheless, average pensions thisyear are projected to rise insignificantlyto some 121 Leva, while the averagesalary in the private and the budget-sub-sidized sector is expected to equal themodest 310 Leva, both figures being farfrom any social policy concept.

That is why 2004 may be referred to asthe litmus-test year for the tax reform ofthe incumbent government. We mayassume also that 2002 was the firstpost-election year of the cabinet ofPrime Minister Simeon Saxe Coburg-Gotha and that his administration heed-ed a one-year period to adapt and com-mission its potential. If Bulgaria man-ages to remain within the target frame-work