Sofia so good
19 October 2009
Since the Bulgarian election businesspeople are feeling more optimistic. By Tom Phillips
With election talk taking place all over Europe, the recession-driven shift towards the political right seems inevitable for most of the struggling continent’s countries.
The move away from the left could not come soon enough for Bulgaria, which in July saw voters reject a socialist government that was blamed for inaction over corruption within its own administration. Bulgarians instead voted for the centre-right, pro-business Citizens for European Development of Bulgaria (known as Gerb in Bulgaria), which picked up 40 per cent of the votes off the back of promises to clean up the system.
Led by Boiko Borissov, a former bodyguard and karate expert nicknamed ‘Batman’ for his crime-fighting talk and burly appearance, Gerb has a lot to live up to.
The business community and lawyers in particular are keen to make sure the party keeps its word. A change in government often comes with renewed optimism for the future, and Bulgaria’s lawyers are hoping that corruption in the courts and the weak legislators that have held the country back for years will finally be vanquished.
“Our clients believe, whether falsely placed or not, that we’ll see a more sensible and less corrupt government from now on,” says Peter Hoffmann, Central and Eastern Europe (CEE) managing partner at Cerha Hempel Spiegelfeld Hlawati (CHSH). “We’ve always been optimistic about Bulgaria. The crash put a dent in the momentum but we hope it’ll come back.”
These sentiments are echoed by Richard Clegg, managing partner of Wolf Theiss’s Bulgaria practice. Clegg says his firm has been operating mainly on the buyers’ side on M&A and joint venture deals. Elsewhere, all practice areas have seen an increase in work since the vote was cast, except real estate which, he says, has all but disappeared.
“For foreign investors there’s a feeling of optimism. Since July we’ve had a steady stream of new mandates. People with cash are looking at the market with clearer eyes,” says Clegg.
Attracting foreign direct investment (FDI) is key for Bulgaria, which remains one of the poorest countries in Europe. Without a suitable legal framework for honest business to take place, many investors have been cautious about ploughing money into projects, despite the clear potential for regeneration.
Foreigners can now be sure of two things: that Bulgaria has survived the crisis and that the new government will pursue a more business-minded approach. In fact, after years of rising land prices, the crash flattened prices back to a more sustainable level.
“The crash has done a lot to clean out a lot of froth in the market, which has encouraged investors to come back,” says Hoffmann. “People are starting to return to business as normal.”
There are even examples of a slight upturn in real estate. CHSH is working on a e80m-e100m (£74.7m-£93.3m) retail development in Sofia that was put on hold for 18 months but has now started again.
The firm is also working on a 60 hectare logistics park outside the capital worth an estimated e400m. These two projects should lead to more investment into the country and would hardly take place in a depressed environment.
Schoenherr partner Markus Piuk, like many of his peers, is cautiously optimistic about the new regime.
“There’s an increase in confidence and we see the future as being a bit brighter. When it was clear the crisis hadn’t brought down the country, projects were restarted again, but it wasn’t like a rocket went off. [Gerb] has some big ideas and they seem to be moving in the right direction.”
The government has already made plans to cut state contributions by employees, which would make Bulgaria more attractive to FDI and possibly the cheapest place in Europe for manufacturers to set up shop.
Grounds for optimism
There has also been other good news. Just last month Nestlé announced it is relocating its ice cream production from Romanian capital Bucharest to Bulgaria. And towards the end of this year Kraft plans to close its chocolate factory in Romania, with Bulgaria the favoured alternative.
“It’s correct that people are cautiously optimistic - Gerb is sending out the right signals,” says David Butts, managing partner of the Sofia office of CMS Cameron McKenna in cooperation with Petkova & Sirleshtov. “People are waiting to see if there’s going to be a witch hunt with the old government. The judicial approach to matters and transparency in the market are all particularly important in a time when you’re fighting for FDI. It’s an opportunity for Bulgaria.”
Anna Rizova-Clegg, a partner at DLA’s Sofia office, says Gerb winning the election is only part of the reason for the new-found belief in the country - the rest is due to practical appointments and decisions that should have a real effect on the business world.
“The new government communicated a clear message to business on its determination to change the direction of government policy taken by its predecessor,” says Rizova-Clegg. “It elected as ministers representatives of the leading business circles and stated its priorities, including a review of administration work and efficiency and policies for public procurement. It set a legislative programme towards improving the investment climate in various sectors, launched infrastructure projects and a review of previous tenders that raised concerns in the EU. A lot of people consider that the government is giving the right signals for increasing, and getting back, the confidence of investors.”
Before that opportunity can be realised there needs to be some important changes. The previous government was derided for being weak on crime and corruption, with ineffectual courts and an unwillingness to enforce legislation.
“It’s great to have a law on the books but someone has to make it work properly,” explains CHSH’s Hoffmann, who is one of many lawyers frustrated by the years of corruption. “The area where [the country] is weak isn’t in legislation, but in enforcing the legislation it does have. We’re hoping the new government will implement proper court reform.”
Hoffmann, who has experience of legal markets throughout CEE, says the officials and judges who cannot be trusted need to be shown an alternative way. “Most of these people would not be bad people if they had the right incentives,” he believes.
To say the election has kick-started a commercial revolution is “far fetched”, according to Schoenherr’s Puik. But fears over Gerb reneging on its mandates have failed to be realised, and lawyers are keeping their fingers crossed. “The new government didn’t throw a damp blanket over anything,” explains Butt.
But changes are definitely on the horizon, often in the form of thousands of rotating sails as renewable energy continues the massive growth seen over the past few years. Wind farms have been popping up along the Black Sea coast, making Bulgarian lawyers experts in this growing practice area.
“Wind energy has become huge - we’re seeing a lot of significant clients in the market. Three years ago they were just land speculators but now they’re fully into the renewable energy sector,” confirms Butt.
These fast-growing companies are benefiting from the available funding as banks and private equity houses look favourably at the alternative energy industry.
There are expected changes to more traditional forms of energy too. Law firms in Sofia are listening with keen ears to Gerb’s plans to privatise some of Bulgaria’s energy plants, including a stake in the plant in the nuclear facility at Belene.
Elsewhere, there is plenty of potential for law firms to pick up a slice of the PPP pie should the corporate-friendly Gerb decide to go down that route. There is no suitable framework in place at present, but there are economic, political and social reasons that suggest it will not be far away.
“There’s a body of private business waiting for it to happen,” says Wolf Theiss’s Clegg. “Lots of these infrastructure deals have been on the books since the 1970s and 80s. I think we’ll see much more infrastructure work towards the end of next year.”
CMS’ Butts agrees. “It’s not surprising to see that regional development is a significant growth area. There’s no doubt that Bulgaria is infrastructurally challenged,” he says.
There could also be big changes in the country’s legal market. Bulgaria has an unusually fractured market, with many international firms - Wolf Theiss, Camerons, Schoenherr and DLA Piper for example - sitting alongside a large number of local firms. The two groups are currently in the midst of an ongoing dispute with the Bulgarian Bar Council over the ‘unfair’ situation of international firms operating in the country.
But with a more corporate-minded party in power this situation is sure to be resolved quickly. And when it is, Piuk believes there could be a shake-up of the law firms.
“I’m curious as to when there’ll be a consolidation process in the country,” he says. “It’s a market with a significant number of foreign firms. These markets are difficult because international firms rely heavily on FDI. Unless a law firm is deeply rooted in the domestic market it can have problems.”
Consolidation or not, Butts sums up the feeling in the country. “Bulgaria is a safer place to do business,” he says. “There are a few bad spots to sort out but it’s going in the right direction.”