Regional Development in the European Union The Case of Bulgaria

Transcription

1 Regional Development in the European Union The Case of Bulgaria Marco Ranieri - Visiting Research Fellow Centre of Excellence Dialogue Europe Sofia University St. Kliment Ohridski - Bulgaria ranieri.marco@unito.it - May Abstract This paper is both analytical and policy oriented and examines regional development in Bulgaria. The paper focuses on three of the six regions of Bulgaria: BG31 Severozapaden (North-West), BG33 Severoiztochen (North-East) and BG42 Yuzhen Tsentralen (South-Central) and provides an analytical framework that could be further deepened with future research. The analytical part of the paper identifies four different development-enabling sets of factors and analyses them in each of the three focus regions. The identified four development-enabling sets of factors can be referred to as: 1. Internal Private: socio-economic region-specific characteristics such as demographic structure and migration, labour market and labour costs, sectoral specialisation, productivity and business concentration, infrastructural and transport facilities, local governance and local civil society; 2. External Private: Foreign Direct Investment and remittances from Bulgarian workers abroad; 3. External Public: ad hoc European Union financial instruments devoted to regional development such as Structural and Cohesion Funds. Some other financial instruments such as Common Agricultural Policy subsidies and Small and Medium Enterprises development funding also fall into this category; 4. Internal Public: central and local Bulgarian public institutions policies for regional development. Starting from this analysis, the outputs of this research are some suggestions on how central and regional public institutions, as well as civil society and Non-Governmental Organizations, could better use the available funds and instruments to improve the living conditions of the population in the analyzed regions. Keywords: European Union, Bulgaria, Regional Development, Regional Policy, Structural and Cohesion Funds, Foreign Direct Investment, Remittances, Small and Medium Enterprises JEL Classification: R11 - Regional Economic Activity: Growth, Development, and Changes, F15 - Economic Integration

2 Index 1. Introduction..p.2 2. Regional Disparities and Regional Policy in the European Union..p.2 3. The Bulgarian NUTS 2 regions BG31 Severozapaden, BG33 Severoiztochen and BG42 Yuzhen Tsentralen... p.5 4. Foreign Direct Investment and Remittances in the target regions.....p.18 Foreign Direct Investment p.18 Remittances from Bulgarian workers abroad p Major European Union funds and development instruments available in the target regions.p.24 Structural and Cohesion Funds.. p.24 Common Agricultural Policy.p.28 Small and Medium Enterprises development instruments..p National instruments and programs for regional development in the target regions...p Suggestions and recommendations p Conclusions.p.39 Bibliography.p.40 Annex p.42 1/49

3 1. Introduction With the enlargements in 2004 and 2007 the European Union (EU) witnessed a dramatic growth in regional disparities and an increased inequality of income and wealth between its regions and its member states 1. To overcome territorial disparities and support its poorest regions the EU has established, since the Treaty of Rome, ad hoc instruments that mainly substitute single member states regional policies. Bulgaria is fully integrated into this system and since its accession mainly delegated its regional policies to the EU. Nevertheless, central and local Bulgarian public institutions still implement some actions for regional development. Next to these external public (EU level) and internal public (national level) development-enabling instruments, the Bulgarian regions focus of this study can also count on external private capitals for development, in the form of Foreign Direct Investment (FDI) and remittances from Bulgarian immigrants abroad. The capability to use in an effective way the available EU funds, to fully benefit from national development policies, to attract FDI and, if possible, to use remittances from abroad for investment and not only for consumption, are all factors that can contribute to improve the living conditions of the population in the analyzed regions. 2. Regional Disparities and Regional Policy in the European Union As the EU has been historically characterized by strong regional disparities, since the Treaty of Rome some ad hoc instruments have been established to foster a balance development. Nowadays, the EU Regional Policy aims to mitigate wealth disparities in different regions and restructuring declining industrial or agricultural areas in order to strengthen economic, social and territorial cohesion among regions and member states. In order to provide a single uniform breakdown of territorial units for the production of regional statistics, and therefore to properly deliver its development funds, the EU has adopted a standard system to identify member countries regions, the Nomenclature of Territorial Units for Statistics (whose acronym is NUTS, for the French Nomenclature d Unités Territoriales Statistiques ). The NUTS classification does not necessarily correspond to administrative divisions within the country and usually overlaps these divisions. 1 According to Eurostat, nowadays the poorest EU regions are mainly located in only three member states: Bulgaria, Romania and Poland. 2/49

4 The NUTS classification has been used in Community legislation since but only in 2003 the Regulation (EC) No 1059/2003 of the European Parliament and of the Council on the establishment of a common classification of territorial units for statistics" was adopted 3. With the 2004 and 2007 enlargements, regions in the 12 new member states were added in this system. The above mentioned Regulation establishes NUTS as a three-level hierarchical classification (NUTS 1, NUTS 2, NUTS 3) 4 where the NUTS 2 level is the one mainly used for statistical purposes as well as to deliver EU regional development funds. Even before the last enlargements in 2004 and 2007 some NUTS 2 regions were well below the EU Gross Domestic Product (GDP) average: especially regions in Greece, Portugal, Ireland, former East Germany, South of Italy and South of Spain strongly benefitted from EU regional development funds. With the last enlargements to Eastern European countries, regional disparities at EU level has grown even more, as in almost all the regions in the new member states the GDP per inhabitant, in Purchasing Power Standard (PPS), is among 50% and 75% of the EU 27 average (Fig.1). Figure 1: GDP per inhabitant, in PPS, by NUTS 2 regions in percentage of EU-27=100, 2006 Source: Eurostat regional yearbook 2009, p Council Regulation (EEC) No 2052/88 on the tasks of the Structural Funds: O.J. L 185 of 15 July Regulation (EC) No 1059/2003 of the European Parliament and of the Council of 26 May 2003 on the establishment of a common classification of territorial units for statistics (NUTS) (Official Journal L 154, 21/06/2003). 4 Level NUTS 1: 7-3 million inhabitants; Level NUTS 2: million inhabitants; Level NUTS 3: million inhabitants. 3/49

5 A harmonized development is one of the main goals of the EU and in 2006 more than 30% of the EU budget has been spent for structural actions, the second share of the budget after agriculture, which used more than 46% that year 5. Also in the new financial framework , formally adopted on 17 May 2006 when the European Parliament, the Council and the Commission signed the Interinstitutional Agreement on budgetary discipline and sound financial management, the cohesion among different EU regions is a key issue and billion euros out of about 975 which have been committed in total (more than 35%) are for Cohesion Policy. In detail, this amount is divided into the three Cohesion Policy objectives in the following way: i) 81.54% for Convergence: available for the Convergence regions which are NUTS 2 regions whose GDP per inhabitant, in PPS, is less than 75% of the EU-27 average; ii) 15.95% for Regional Competitiveness and Employment: available for all the NUTS 2 regions to strengthen competitiveness, attractiveness and employment; iii) 2.51% for European Territorial Cooperation: available for all the NUTS 2 regions to strengthen cross-border co-operation, transnational co-operation and interregional cooperation. These three objectives of regional policy are supported by three different funds: i) European Regional Development Fund (ERDF): focused on the poorest regions and on economic modernisation/diversification and sustainable jobs; it finances all the three objectives; ii) European Social Fund (ESF): focused on adaptability of workers and enterprises, employment, social inclusion; it finances the Convergence objective and the Regional Competitiveness and Employment objective; iii) Cohesion Fund (CF): focused on transport networks and environment projects; it finances the Convergence objective. CF is available for member states whose Gross National Income (GNI) per capita is below 90% of the Community average. Bulgaria is fully integrated into this system and for the period it will receive billion euros of which billion for the Convergence objective and billion for the European Territorial Cooperation objective. 5 EC, General budget of the European Union for the financial year /49

6 3. The Bulgarian NUTS 2 regions BG31 Severozapaden, BG33 Severoiztochen and BG42 Yuzhen Tsentralen According to NUTS 2 classification, Bulgaria is divided into six regions (Fig.2): BG31 Severozapaden (North-West), BG32 Severen Tsentralen (North-Central), BG33 Severoiztochen (North-East), BG34 Yugoiztochen (South-East), BG41 Yugozapaden (South-West) and BG42 Yuzhen Tsentralen (South- Central). These regions overlap the existing territorial division into 28 provinces 6, thus each of the six regions include four or five provinces 7. Figure 2: Bulgaria NUTS 2 regions Source: Eurostat web site, reworking In , five of the seven EU NUTS 2 regions with the lowest GDP per inhabitant, in PPS, were located in Bulgaria (basically all the Bulgarian NUTS 2 regions besides BG41 Yugozapaden, where Sofia and its surroundings are located). All the 16 poorest regions of the EU are located in only three (new) member states: Bulgaria, Romania and Poland (Fig.3). 6 The provinces were only nine between 1987 and In turn, each province is divided into a number of municipalities, for a total of Last data available on Eurostat. 5/49

7 Figure 3: NUTS 2 regions with lower GDP per inhabitant, in PPS, 2006 Source: Eurostat web site, reworking In 2006 in Bulgaria the GDP per inhabitant, in PPS, was euros in BG31 Severozapaden, in BG32 Severen Tsentralen, in BG42 Yuzhen Tsentralen, in BG34 Yugoiztochen, in BG33 Severoiztochen and in BG41 Yugozapaden. This research focuses on three of the poorest EU NUTS regions which are located in Bulgaria: BG31 Severozapaden, BG33 Severoiztochen and BG42 Yuzhen Tsentralen. These three regions have been chosen because they have heterogeneous characteristics and they can make the analysis more interesting and valuable. The chosen regions: are distributed across the country and cover different parts of it (North-West, North-East, South- Central); have different geographical and socio-economic structures: BG31 Severozapaden is the poorest region of Bulgaria, BG33 Severoiztochen one of the richest. Moreover, in the period in BG33 Severoiztochen and BG42 Yuzhen Tsentralen the GDP per inhabitant, in PPS, increased between 5% and 7% 9 while in BG31 Severozapaden it felt by 0.7% (Fig.4). bordering with old member states (BG 42 Yuzhen Tsentralen with Greece), new member states (BG31 Severozapaden and BG33 Severoiztochen with Romania), candidate countries (Yuzhen Tsentralen with Turkey) and not official candidate countries (BG31 Severozapaden with Serbia) they have different region-specific features and can implement different kinds of cross-border cooperation. 9 A result exceeded only by the performance of BG41 Yugozapaden region, where Sofia and its surroundings are located, that grew more than 7%. 6/49

8 Figure 4: Change of GDP per inhabitant, in PPS, by NUTS 2 regions, 2006 as compared with 2001 In percentage points of the average EU-27 Source: Eurostat regional yearbook 2009, p. 55 The first set of development-enabling factors here identified can be referred to as Internal Private. It includes socio-economic region-specific characteristics such as demographic structure and migration, labour market and labour costs, sectoral specialisation, productivity and business concentration, infrastructural and transport facilities, local governance and local civil society 10. An analysis of the three chosen regions follows. 10 For reference see the figures in the Annex. 7/49

9 NUTS 2 BG31 Severozapaden region (Fig.5) includes five provinces: Vidin Province (1), Montana Province (2), Vratsa Province (3), Pleven Province (4) and Lovech Province (5). The capital of the region is the city of Pleven. Figure 5: BG31 Severozapaden region BG31 Severozapaden is the poorest region in Bulgaria and the second poorest region in the entire EU. As above mentioned, it is also the only region in Bulgaria (and one of the only four regions in all the new member states and Croatia) 11 that in the period decreased its GDP per inhabitant, in PPS, in percentage points of the average EU-27 (-0.7%). Demographic structure and migration In 2007 BG31 Severozapaden was the only region in Bulgaria whose population density was less than 50 inhabitants per km 2 and one of the two regions (with its neighbour BG32 Severen Tsentralen) that registered, between 2003 and 2007, the highest level of (negative) total population change, with a lost higher than 6 per 1000 inhabitants. At EU level, BG31 Severozapaden is the only region in the entire Union that reported a decline in population higher than 2%. Looking at the two components of total population change, namely natural change and migration, it is showed that the total population change in BG31 Severozapaden is highly affected by both of them. BG31 Severozapaden is indeed one of the two Bulgarian regions (again with its neighbour BG32 Severen Tsentralen) in which the average natural population change (live births minus deaths in the 11 The other NUTS 2 regions with such decrease were Dél-Dunántúl in Hungary (-1.1%), Malta ( 1.0%) and Kypros/Kıbrıs (- 0.6%). 8/49

10 period ) is deeply negative (higher than 6 per 1000 inhabitants) and the only region in Bulgaria with a net migration higher than 6 per 1000 inhabitants. The combination of these factors determine BG31 Severozapaden to be the oldest region of Bulgaria, with the percentage of population aged 65 years old and more being more than 20%. Labour market and labour costs In 2007 in BG31 Severozapaden the employment rate for the age group was a pretty low 55-60% (as in BG33 Severoiztochen) with an unemployed rate of 8-10%. In all the Bulgarian regions people work weekly more hours than in the Western Europe and all the regions recorded a low share of parttime workers in overall employment (less than 10%). In BG31 Severozapaden the average number of usual weekly hours was 40,5 while the highest values in Bulgaria (more than 42 hours a week) are recorded in the other two target regions of this research: BG42 Yuzhen Tsentralen and BG33 Severoiztochen (with the highest value in the country, 42,4 hours). In five out of the six Bulgarian regions, including BG31 Severozapaden, the share of employees 12 in overall employment is high, between 85 and 90%. The only exception is BG42 Yuzhen Tsentralen, where this value is little lower (between 80 and 85%). Sectoral specialisation, productivity and business concentration The Bulgarian economy can be roughly divided into a North where the most important sector in terms of value added is Agriculture, forestry and fishing, a South-East where next to Agriculture, forestry and fishing an important sector is Industry and construction and the BG41 Yugozapaden region (South- West), where there is not a dominant sector being the economic activity diversified in Agriculture, Industry and construction and Service sector. Moreover, the coastal BG33 Severoiztochen and BG34 Yugoiztochen are the regions with the highest touristic activity. In BG31 Severozapaden the most important sector is Agriculture, forestry and fishing, next to some light industries connected with the transformation of agricultural products, such as food and beverages (production of butter, yellow cheese, dry milk and other dairy products; meat products), wood processing and furniture, textile and sewing industries and other light industries. The region does not have a specific touristic appeal, being one of the three regions with less than 2 million nights spent in hotels in BG31 Severozapaden is moreover the region with the lowest share of international tourists, being the non-residents share of nights spent in hotels less than 16% of total (in the coastal regions this share is higher than 60%). 12 Regional labour market data are broken down into three categories: employees (which comprises all personnel with a contract of employment), self-employed and family workers. 9/49

11 Infrastructural and transport facilities Due to its strategic location, five of the ten Trans-European Corridors 13 pass through Bulgaria (Fig.6). Figure 6: Pan European Transport Corridors in Bulgaria Source: Even if crossed by Corridor IV (Craiova, in Romania Vidin Sofia Kulata) and Corridor VII (water Corridor Rhine Main Danube), nowadays BG31 Severozapaden has a relatively scarce and inefficient network of transport. There are not highways and even the important roads (second-class road II-81 Sofia Petrohan pass Montana Port of Lom, road E-83/I-3 Botevgrad-Byala and road E-772/I-4 Sofia- Sevlievo-Veliko Tarnovo-Shumen) are not in good conditions. Main railways in the region include the routes Sofia-Mezdra-Vratsa-Vidin, Russe-Varna-Sofia and Troyan-Levski-Svishtov. The main ports on the Danube River are Lom and Nikopol, minor ports are in the villages of Somovit (where there is a border checkpoint), Zagrazhden and Baikal. In the framework of Corridor VII development, in 2007 the construction of the second bridge on the Danube between Bulgaria and Romania ( Danube Bridge 2 ) 14 began but the project is facing problems and could be delayed. In the region there are not airports but there are three Certified Airfields : Erden (Montana), Grivitza and Bohot-LM (Pleven) 15. In BG31 Severozapaden there are two of the six industrial zones 16 of Bulgaria (Fig.7). An important industrial zone ( m 2 ) is in Vidin, located on the bank of the Danube in immediate proximity to the Vidin-Kalafat ferry terminal and the planned Danube Bridge 2. The above mention delay in the 13 Corridors IV, VII (water), VIII, IX and X. 14 More information on the project on 15 Ministry of Transport, Civil Aviation Administration. 16 They have been recently re-launched as a Government instrument to attract FDI and boost economic growth and employment. See part 6 of this research. 10/49

12 construction of the bridge can seriously undermine the success of the industrial zone. The other industrial zone is in Pleven ( m 2 ). Figure 7: Bulgarian industrial zones Source: Local governance and local civil society To show the level of civil society s awareness and action in each region, a first proxy indicator is here used: the number of Non-Governmental Organizations (NGOs) registered in the Central Registration Database of NGOs, established on the grounds of the Non-Government Organisations Law (Prom. SG. 81/6 Oct 2000) at the Ministry of Justice. According to the Register, there are 100 NGOs in Vidin Province, 92 in Montana Province, 146 in Vratsa Province, 187 in Pleven Province and 96 in Lovech Province, for a total of 621 NGOs. This big number include NGOs with any scope (environmental NGOs, human rights NGOs, etc.) so to have an indication of the role of civil society s organizations in regional development, a second proxy indicator is here considered: only the number of NGOs members (or that has been members in the last years) of the Bulgarian Association of Regional Development Agencies (BARDA). BARDA is the only decentralised non-governmental umbrella organisation of independent regional development agencies and business centres in Bulgaria whose constituent organisations are legally independent, non-governmental bodies working at the regional level. In BG31 Severozapaden there are three Regional Development Agencies which are members of BARDA: Vidin Agency for Regional Development and Business Center, Vratza Regional Economic Development Agency and Pleven Regional Enterprise Support Centre. Moreover, in the last years also other two NGOs have been BARDA members: Montana Agency for Regional Development and Business Center 2000 and Private Association for Development Balkan-Lovech. 11/49

13 NUTS 2 BG33 Severoiztochen region (Fig.8) includes four provinces: Dobrich Province (6), Targovishte Province (7), Shumen Province (8) and Varna Province (9). The capital of the region is the city of Varna. Figure 8: BG33 Severoiztochen region BG33 Severoiztochen is, after BG41 Yugozapaden, the richest region in Bulgaria and one of the most dynamic: in the period its GDP per inhabitant, in PPS, increased in percentage points of the average EU-27 between 5 and 7% (see Fig.4). Demographic structure and migration In 2007 BG33 Severoiztochen was one of the four Bulgarian regions 17 whose population density was between 50 and 100 inhabitants per km 2 and one of the three regions that, in the period , registered a negative total population change between 3 and 6 per 1000 inhabitants. This decrease is mainly due to natural change (live births minus deaths between -1 and -3 per 1000 inhabitants) as BG33 Severoiztochen is the region, besides BG41 Yugozapaden, that registered the lowest net migration rate (between -1 and 0 per 1000 inhabitants). The combination of these factors determine BG33 Severoiztochen to be the youngest region of Bulgaria, with the percentage of population aged 65 years old and more being between 14 and 16%. 17 Only BG31 Severozapaden has less than 50 inhabitants per km 2 and the capital region BG41 Yugozapaden has between 100 and /49

14 Labour market and labour costs As above mentioned, in 2007 in BG33 Severoiztochen the employment rate for the age group was a pretty low 55-60%. In this region however this data, combined with the young demographic structure, determine that BG33 Severoiztochen is the regions in Bulgaria (with the neighbouring BG32 Severen Tsentralen) with the highest unemployment rate: more than 10%. A peculiarity of BG33 Severoiztochen is that this region records the highest value in the country regarding the average number of usual weekly hours: Also in this region the share of part-time workers in overall employment is less than 10% and the share of employees in overall employment is between 85 and 90%. Another characteristic of BG33 Severoiztochen (also recorded in BG34 Yugoiztochen) is that for the summer season a share of the population living in the internal areas (unemployed or even employed) move to work on the touristic resorts on the coast and therefore demand and supply of labour force are influenced by the seasonal factor. Sectoral specialisation, productivity and business concentration As in BG31 Severozapaden, also in BG33 Severoiztochen the Agriculture, forestry and fishing sector is important in term of value added. Main industries are linked to agriculture and they include food and drink production (milk products, oil and margarine, meat, poultry products, flour, bread and pastry production, fodder, wines and spirits, soft drinks) and wood processing and furniture production. Other main industries include machine building and metal working and other processing industry (mechanical engineering, non-ferrous metallurgy, chemical industry, tobacco, glass and porcelain production, textiles). In the region also tourism has a very important role, with 4-10 million of nights spent in hotels in 2007, more than 60% of which by foreigner tourists. The lead city in the touristic industry, as well as one of the richest cities in Bulgaria, is the regional capital Varna. Its main economic sectors include harbour activities, shipping, shipbuilding, tourism, chemical industry, mechanical engineering, textiles, food, wine and tobacco industries, furniture production, construction and agriculture. Due to its peculiar position and being one of the biggest EU harbour on the Black Sea, also transport, storage, communications, trade, repair and technical services have an important role in the region and in Varna Province in particular. Infrastructural and transport facilities BG33 Severoiztochen has good transport system and it is crossed by Corridor VII (Danube River) and Corridor VIII (connecting Varna to Durres, in Albania). Especially the Province of the capital Varna has one of the highest densities of road infrastructure in the whole country. 13/49

15 Main roads include fist-class road E-772, I-4 (Sofia-Sevlievo-Veliko Tarnovo-Targovishte-Shumen- Varna), second-class roads E-48 (Omurtag-Kotel-Gradets), E-49 (Tutrakan-Razgrad-Targovishte) and international roads I-2 Russe-Shumen-Varna, I-4 Sofia-Turgoviste-Belokopitovo and I-7 Silistra- Shumen-Yambol. Main railways include the line Sofia-Mezdra-Gorna Oryahovitsa-Kaspichan-Varna, the line Shumen-Komunari South Bulgaria and the line Russe-Kaspichan. Moreover, the port of Varna is the largest in Bulgaria, handling more than 8 million tons of cargo per year. BG33 Severoiztochen has also good air national and international connections through the Varna International Airport (the largest after Sofia) and the Targovishte Airport, which can serve small and medium-sized aircrafts. There are also other two Certified Airfields around Varna (Balchic and Izgrev). BG33 Severoiztochen has good access to energy supplies, with most of the pipelines for imported gas running through it and hosts the country s largest thermal electricity plant (near Varna). Finally, BG33 Severoiztochen hosts one of the six industrial zones of Bulgaria, the Varna West industrial zone. This zone is located on the territories of two municipalities: m 2 in the territory of Suvorovo and an area of m 2 in the territory of Vetrino. Local governance and local civil society In BG33 Severoiztochen there are 826 registered NGOs: 131 in Dobrich Province, 73 in Targovishte Province, 134 in Shumen Province and 488 in Varna Province. Among them, there are three Regional Development Agencies members of BARDA: Dobrich Agency for Regional Economic Development and Investment, Varna Agency for Economic Development and Shumen Agency for Steady Regional Development and Investments. In the past years, also Targoviste Agency for Regional Development was part of the BARDA network. 14/49

16 NUTS 2 BG42 Yuzhen Tsentralen region (Fig.9) includes five provinces: Pazardzhik Province (10), Plovdiv Province (11), Haskovo Province (12), Smolyan Province (13) and Kardzhali Province (14). The capital of the region is the city of Plovdiv. Figure 9: BG42 Yuzhen Tsentralen region BG42 Yuzhen Tsentralen has a peculiar situation: as region it is in the inferior half in the scale of GDP per inhabitant, in PPS, in Bulgaria, but its capital (Plovdiv) is one of the richest cities in Bulgaria 18. In the period BG42 Yuzhen Tsentralen was, with BG 33 Severoiztochen, the region with the highest growth in GDP per inhabitant, in PPS, with an increase in percentage points of the average EU- 27 between 5 and 7% (in 2001, it was the Bulgarian region with the lowest GDP per inhabitant). Demographic structure and migration As in BG33 Severoiztochen, in 2007 in BG42 Yuzhen Tsentralen the population density was between 50 and 100 inhabitants per km 2 and, in the period , the total population change registered a loss between 3 and 6 per 1000 inhabitants. This decrease was due to the combination of unfavourable natural population change (between -1 and -3 per 1000 inhabitants) and net migration rate (between -3 and -1 per 1000 inhabitants). These values are not extreme and their combination determines an average situation where the percentage of population aged 65 years old and more is between 16 and 18%. 18 In 2008 the Plovdiv Province alone produced about 13% of the country s GDP. 15/49

17 Labour market and labour costs In 2007 BG42 Yuzhen Tsentralen registered the second highest employment rate for the age group in Bulgaria 19 (between 65 and 70%) and also the second lowest unemployed rate 20 in the country (between 4 and 8%). BG42 Yuzhen Tsentralen is also one of the two regions with the highest average number of usual weekly hours in Bulgaria, more than 42 hours a week. If from one side also in this region the share of part-time workers in overall employment is less than 10%, BG42 Yuzhen Tsentralen is, on the other side, the only regions in Bulgaria where the share of employees in overall employment is below 85%. Sectoral specialisation, productivity and business concentration BG42 Yuzhen Tsentralen has a mix pattern of important sectors in term of value added, it includes Agriculture, forestry and fishing and Industry and construction. Main industries include food and beverages processing, tobacco, wood processing, textiles, mining industry based on ferrous and nonferrous resources, non-ferrous metallurgy, electricity and heating generation, machine building, production of equipment for agriculture and chemical industry. The touristic sector is not very developed (less than 2 million nights spent in hotels in 2007) but it is capable to attract foreign tourists (16-30% of nights spent in hotels regarded foreigners). As above mentioned, in BG42 Yuzhen Tsentralen the specific weight of the capital city (Plovdiv) is very high: the Plovdiv Province alone produces about 13% of the country s GDP. Infrastructural and transport facilities BG42 Yuzhen Tsentralen has a strategic position and has borders with Turkey and Greece. The region is well connected with Bulgarian and foreign destinations and its capital city, Plovdiv, hosts one of the Bulgarian international airports and is crossed by Corridors IV, VIII and X. Also Corridor IX crosses the region, in the city of Haskovo. BG42 Yuzhen Tsentralen is crossed by one of the most important motorways in Bulgaria (Trakia motorway), connecting Sofia with Burgas, on the Black Sea. Other main routs include first-class road I-5 (Kardzhali-Haskovo-Stara Zagora-Russe), which is part of the international road E-85 (Romania-Bulgaria-Greece) and the second-class roads 58 and 59. Another important project is the construction of the Maritsa motorway, which will connect Plovdiv to Svilengrad, on the Bulgarian-Turkish border. Also the density of the first and second class roads is considerably high and the region is also crossed by the Kardzhali-Dimitrovgrad railway. 19 After BG41 Yugozapaden. 20 Still after BG41 Yugozapaden. 16/49

18 BG42 Yuzhen Tsentralen hosts two of the six industrial zones of Bulgaria, the Svilengrad Industrial Zone ( m 2 ) and the Karlovo Industrial Zone ( m 2 ) in the Plovdiv Province. The Svilengrad Industrial Zone is located next to the Bulgarian-Greek border, the railroad station along the Sofia- Plovdiv-Svilengrad-Istanbul line and it offers access to Pan-European transport Corridor X. The Karlovo Industrial Zone is 50 km North of Plovdiv, 45 km to Trakia Highway and in proximity to the I-6 main road Sofia-Burgas and to the Sofia- Burgas train line. Local governance and local civil society In BG42 Yuzhen Tsentralen there are 985 registered NGOs: 198 in Pazardzhik Province, 464 in Plovdiv Province, 162 in Haskovo Province, 97 in Smolyan Province and 64 in Kardzhali Province. Among them, there are four Regional Development Agencies members of BARDA: Pazardzhik Regional Economic Development Agency and Business Incubator, Plovdiv Regional Development Agency with Business Support Centre for SMEs, Haskovo Regional Agency for Social-Economic Development and Kardzhali Regional Economic Development and Investment Agency In the past years, also Devin Centre for Support and Assistance of Entrepreneurship was part of the BARDA network. 17/49

19 4. Foreign Direct Investment and Remittances in the target regions The second set of development-enabling factors here identified can be referred to as External Private, namely Foreign Direct Investment (FDI) and remittances from Bulgarian workers abroad. Foreign Direct Investment In comparison with other Eastern European countries, Bulgaria was capable to attract a good amount of FDI (Tab.1). As cumulative FDI inflows between 1989 and 2008, Bulgaria (with 41,448 million USD) ranks only behind the biggest economies such as Poland, Hungary and Romania. In the same period, as cumulative FDI inflows per capita (5,454 USD), Bulgaria ranks only behind Czech Republic, Estonia and Croatia. Table 1: FDI, net inflows recorded in the balance of payments, million of dollars (USD) Estimate Cumulative FDI inflows Cumulative FDI inflows per capita USD Croatia ,392 1,105 1, , ,551 3,194 4,736 4,576 23,164 5,215 Czech Republic 1,280 1,259 3,575 6,220 4,942 5,474 8,282 1,814 3,941 11,630 4,043 8,955 8,972 75,226 7,287 Estonia , , ,770 6,530 Hungary 3,335 3,715 3,070 3,060 2,151 3,573 2, ,405 5,586 3,640 2,197 4,685 53,242 5,295 Latvia ,491 1,945 1,092 8,759 3,857 Lithuania ,551 1,409 1,490 9,331 2,779 Poland 4,445 4,863 6,049 7,239 9,327 5,804 3,901 4,284 11,761 6,951 10,727 17,987 11, ,529 2,927 Slovak Republic ,897 1,520 4,130 1,913 3,052 2,279 4,178 2,881 3,156 27,115 5,011 Slovenia , ,081 1,531 Albania ,505 1,101 Bosnia and Herzegovina ,088 1,003 6,228 1,639 Bulgaria ,070 2,879 4,005 7,583 11,433 8,472 41,448 5,454 FYR Macedonia ,226 1,570 Montenegro na na na na na ,791 4,229 Romania 415 1,267 2,079 1,025 1,051 1,154 1,080 2,156 6,368 6,587 10,957 9,629 13,519 58,224 2,683 Serbia , ,550 4,264 2,523 2,717 15,040 2,005 Source: EBRD, Transition Report 2008: Growth in transition Several factors contributed to successful attracting FDI. Among them, political stability connected with NATO and EU membership, a favourable and stable macroeconomic environment linked to among others- the currency board (introduced in 1997) and a general good performance in public accounts, qualified and cheap labour force, low corporate income taxes, strategic geographical position, a set of fiscal and legal investors-favourable policies adopted through the years by different Governments and the privatization process. 18/49

20 The performances in 2007 and 2008 were particularly good (Tab.2). Bulgaria was the country with the highest FDI inflow per capita (1,504 USD) in Eastern Europe in 2007 and the second, after Montenegro, in 2008 (1,115 USD). Bulgaria was also the country in Eastern Europe with the highest FDI inflow as percentage of GDP: 28.9% in 2007 and 17.0% in Due to the global crisis, estimations of the Bulgarian National Bank show that this percentage dropped at 8.4% for 2009, being the total FDI inflow 2,844.8 million euros for that year 21. Table 2: FDI, inflows per capita (USD) and in per cent of GDP FDI inflows per capita (USD) FDI inflows (in per cent of GDP) Croatia 1,066 1, Czech Republic Estonia Hungary Latvia Lithuania Poland Slovak Republic Slovenia Albania Bosnia and Herzegovina Bulgaria 1,504 1, FYR Macedonia Montenegro 1,087 1, Romania Serbia Source: EBRD, Transition Report 2008: Growth in transition To better understand how different parts of Bulgaria benefit from the general good performance in attracting FDI as a country, data must be analysed at regional level (Tab.3). 21 Bulgarian National Bank, press release on Balance of Payments, 15 February /49

21 Table 3: FDI by regions, million USD ( ) Province Total Percentage Province Total Percentage Vidin Gabrovo Montana Veliko Tarnovo Vratsa Russe Pleven Razgrad Lovech Silistra TOT. BG31 Severozapaden TOT. BG32 Severen Tsentralen Dobrich Blagoevgrad Targovishte Kyustendil Shumen Pernik Varna 2, Sofia 1, TOT. BG33 Severoiztochen 2, Sofia - city 23, Pazardzhik TOT. BG41 Yugozapaden 24, Plovdiv 1, Stara Zagora Haskovo Sliven Smolyan Yambol Kardzhali Bourgas 2, TOT. BG42 Yuzhen Tsentralen 1, TOT. BG34 Yugoiztochen 3, TOT Bulgaria 33, Source: Invest Bulgaria Agency, reworking The distribution of FDI in Bulgaria among the regions is very uneven. In the period from 1992 to 2008 BG41 Yugozapaden (and in it mainly the city of Sofia) attracted the biggest share of FDI (73.7% of the total): 24,781.2 million dollars out of a total of 33, The coastal regions BG34 Yugoiztochen and BG33 Severoiztochen also attracted good flows although much smaller than BG34 - of FDI, followed by BG42 Yuzhen Tsentralen and BG32 Severen Tsentralen. The region less attractive for FDI is BG31 Severozapaden. Looking at FDI per capita (Tab.4), the disparities are even bigger as, for example, BG41 Yugozapaden with only 27.5% of the total population 22 attracted 73.7% of the total FDI in the period (11,696 USD per capita) while BG31 Severozapaden with 12.4% of the total population attracted only 1,8% of the total FDI (622 USD per capita). Table 4: FDI by regions per capita, (USD) Population 2005 (units) Percentage of the total population FDI (million USD) Percentage of total FDI FDI per capita (USD) BG31 Severozapaden 957, BG32 Severen Tsentralen 949, BG33 Severoiztochen 996, , ,438 BG34 Yugoiztochen 1,134, , ,868 BG42 Yuzhen Tsentralen 1,560, , ,101 BG41 Yugozapaden 2,118, , ,696 TOT 7,718, , ,358 Source: Invest Bulgaria Agency, reworking 22 This is a rough calculation as it does not consider population change but it gives good indications of FDI per capita. 20/49

22 Also the pattern of FDI in the decade (Fig.10) implicitly tells which regions benefitted more and which ones less from the flow of investments. FDI in real estate (22% of the total amount) mainly went in the city of Sofia and its surroundings, touristic venues on the coast and in some mountain resorts (such as Bansko and Borovetz in BG41 Yugozapaden and Pamporovo in BG42 Yuzhen Tsentralen). Also FDI in finance and manufacturing mainly concentrated in the capital city. Figure 10: FDI stock by sector, million EUR and in percentage ( ) Source: Invest Bulgaria Agency, reworking BG31 Severozapaden The region is the worst performer in term of attracting FDI. In it attracted only 1.8% of the total amount of FDI (595.7 million USD), with 622 USD per capita. The lack of infrastructure, industrial activity (the region in mainly agricultural) and the general low economic performance were obstacles to attract FDI. Two Provinces, Pleven and Lovech, which have a more central position and are better connected with the rest of the country received million USD out of the attracted in the whole region. Most of the FDI focused on industries connected with the transformation of agricultural products (food and beverages, wood processing and other light industries). BG33 Severoiztochen This region was able to attract a good amount of FDI, comparable with the other Eastern region BG34 Yugoiztochen. FDI are concentrated in the capital city and its surroundings: in the period Varna Province attracted 2,169.2 million USD out of a total of 2,430.6 arrived in the entire region. Many FDI focused on real estate on the coastal area and this rapid urbanisation, from one side, brought a certain degree of development and wealth but, on the other side, posed some concerns about the environment preservation. Moreover, FDI in this region, as well as on the coastal area in BG34 Yugoiztochen, were in many cases aimed at property speculation, with value of the real estate 21/49

23 properties pushed up in the bubble. In last two years, due to the global crisis the value of the properties on the coastal areas felt up to 30% and this poses serious concerns on the future development of the region. FDI in this region (and mainly in Varna) are focused also on touristic services, transport and logistics facilities, ship building and repair, fertilizers, soda and cement production. BG42 Yuzhen Tsentralen This region attracted a pretty low stock on FDI: 1,718.8 million USD in the period (5.1% of the total amount of FDI). Being BG42 Yuzhen Tsentralen the second biggest region of Bulgaria in term of population (20.2% of the total, after BG41 Yugozapaden with 27.5% of the total) the FDI per capita is low (1,101 USD). Also in this region the capital city, Plovdiv, attracted the biggest portion of FDI (1,459.7 million USD out of 1,718.8). In BG42 Yuzhen Tsentralen there is the Province that attracted the lowest amount of FDI in the entire country, Kardzhali Province (only 1.2 million USD). In BG42 Yuzhen Tsentralen FDI focused on manufacturing industries (food and beverage, wood processing, mechanical engineering, metallurgy), distribution (international chains as METRO Cash & Carry, Billa, Kaufland) and also tourism (the above mentioned Pamporovo mountain resort). Remittances from Bulgarian workers abroad Next to private foreign flows of capitals (FDI), Bulgaria also receives yearly a considerable amount of capitals from Bulgarian citizens working abroad. The country registers a net immigration rate and since years this diaspora helps the national economy through remittances. To give a short historical background, it is possible to divide the Bulgarian immigration since 1989 into four periods 23. The first wave of immigrants left Bulgaria in 1989, just after the abolition of the exit visa requirements. In this year around 250,000 Bulgarian citizens (mainly belonging to the Turkish minority) left the country. This immigration was mainly due to political reasons and was mainly directed to Turkey. The second wave of immigration, the first one mainly due to economic reasons, was in the nineties ( ); in these ten years an estimated 441 thousands Bulgarians (to add to the 250,000 immigrants of 1989) left the country. The third wave of immigration took place in the interim period 2001 (year in which Bulgaria was removed from the black Schengen list ) (year of Bulgarian accession to the European Union). In this period a series of combined events influenced immigration rate: from one side the removal from the black Schengen list made immigration easier, but from the other side the constant improvement in the economic and social conditions increased job opportunities 23 Our reworking of Markova (2009). 24 In April 2001; since then the Bulgarian citizens can travel freely within the Schengen area for three months. 22/49

24 and income levels in the country. Anyway, the net effect was a decreasing in emigration level 25 that involved an average of 90,000 people a year. The fourth period started with Bulgarian membership to the EU and it is characterized by a stable rate of immigration and an increasing rate of emigration 26. In 2009 approximately 1.5 million Bulgarian were based abroad, mainly in Greece, Italy, the Netherlands, Germany and Spain. It is difficult to estimate the real amount of private funds sent to Bulgaria by immigrants, as only a part of it transit through measurable channels (e.g. money transfer systems) and a part of it is sent to Bulgaria in cash by immigrants visiting their relatives or by other means (buses, private transport means). Even more difficult is to have data at regional level 27. According to the World Bank, in 2007 remittances to Bulgaria were 2.13 billion dollars and they reached 2.63 billion in 2008 (5.4% of Bulgarian GDP that year). In 2009, due to the world crises, the amount of remittances was around 2.2 billion and forecasts are still uncertain for Remittances are mainly used in the housing market (buying, building or renovating homes), for consumption related to the house-system (furniture, household appliance, etc.) and in the retail trade (opening small retailing shops). Due to the financial crisis in Greece, in the first months of 2010 a bigger-than-usual flow of Greek consumers, attracted by lower prices, is registered in the Bulgarian towns and cities next to the border (such as Sandanski and Petrich, in the BG 34 Yugoiztochen region). Greek consumers go to Bulgaria mainly to buy food, electrical equipment and for some services such as dental treatments. Their expenses are estimated to be 1 million euros per month. 25 And an increase of immigration level. Nowadays the main foreign communities are from Russia, Ukraine, Macedonia, Turkey and Moldova. 26 That probably will further grow when Bulgaria will fully join the Schengen Area. 27 This topic could be deepened with future research. 23/49

25 5. Major European Union funds and development instruments available in the target regions The third set of development-enabling factors here identified can be referred to as External Public. It mainly includes ad hoc EU financial instruments devoted to Cohesion Policy such as Structural and Cohesion Funds. Structural and Cohesion Funds Main expected impacts of these Cohesion Policy funds in Bulgaria are helping to increase GDP by 15% by 2020, job creation and increased investment in research and development 28. As mentioned, the new financial framework is about 975 billion euros, of which billion committed for Cohesion Policy (more than 35% of the total). Bulgaria is fully integrated into this system and it will receive billion euros of which billion for the Convergence objective and billion for the European Territorial Cooperation objective (Tab.5 and 6). EU Bulgaria Table 5: Cohesion Policy , million of euros (indicative) Total Cohesion Policy Regional Competitiveness Convergence ( ) and Employment 347, ,270 55,400 (100%) (81.54%) (15.95%) 6,853 6,674 (100%) (97,39) - Source: European Commission, Directorate General for Regional Policy European Territorial Cooperation 8,740 (2.51%) 179 (2,61) Table 6: Cohesion Policy , Bulgaria, EU and national allocations per objective and fund (billion of euros) Objective Fund EU National Public Total CF Convergence Total Convergence 6.7 ERDF ESF Total European Territorial Cooperation* TOTAL Source: European Commission, Directorate General for Regional Policy This allocation will grow from million euros in 2007 to 1,260.6 million euros in 2013 (Tab.7). Table 7: Cohesion Policy , Bulgaria, allocations per year (million of euros) Tot , , , , ,852.9 Source: European Commission, Directorate General for Regional Policy 28 European Commission, European Cohesion Policy in Bulgaria, /49

26 The allocation by sector of the Funds for the period gives information about the main priorities for Bulgarian development. The ERDF and the CF (Fig.11) mainly focus on transport (34.9% of the total funding), environmental protection and risk prevention (27.9%) and research and technological development (11.6%). Figure 11: European Regional Development Fund/Cohesion Fund in Bulgaria, Allocation by sector Source: Cohesion Policy , National Strategic Reference Frameworks, p.17 The ESF (Fig.12) mainly focuses on improving human capital (31.3%) and improving access to employment and sustainability (31.0%). Other important sectors are increasing the adaptability of workers and firms, enterprises and entrepreneurs (14.1%) and strengthening institutional capacity at national, regional and local level (13.3%). Figure 12: European Social Fund in Bulgaria, Allocation by sector Source: Cohesion Policy , National Strategic Reference Frameworks, p.17 25/49

27 As for the previous financial framework , the principles of intervention of the EU regional policy funds are complementarity, coherence, coordination, conformity and additionality. The last one is particularly important because Structural Funds must not substitute national spending for infrastructure. Moreover, for the period the following principles are introduced: proportionality, equality between men and women and non-discrimination, sustainable development and use of funds to focus on the Lisbon strategy priorities. A key principle that has been strengthened for the period is partnership ; it states that any appropriate organisation representing civil society, environmental partners, NGOs and organisations responsible for promoting equality can participate in negotiations concerning the use of Structural Funds. These stakeholders can (and should) participate not only in management of Structural Funds but in every programming and managing stage (setting up, follow-up and evaluation). To implement the EU Cohesion Policy at national level, according to the Articles of the Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on ERDF, the ESF and the CF, the Bulgarian Government has prepared the National Strategic Reference Framework (NSRF). This is a mid to long-term strategic document, describing the role of the Structural Funds during the period in support of the wider development strategy of Bulgaria. It fixed four strategic priorities (improving infrastructure, increasing the quality of human capital, fostering entrepreneurship and supporting balanced territorial development), then translated into seven Operational Programmes (OP) (administrative capacity, competitiveness, environment, human resources development, regional development, technical assistance, transport) (Tab.8). In other words, the NSRF presents the entire strategy for developing sustainable territorial communities which has to be realised through the OP. Table 8: Cohesion Policy Funds by Operational Programme (euros) Operational Programme Fund Amount Administrative capacity ESF 153,670,724 Competitiveness ERDF 987,883,219 ERDF 439,059,208 Environment CF 1,027,366,274 Human resources development ESF 1,031,789,139 Regional development ERDF 1,361,083,545 Technical assistance ERDF 48,296,513 Transport ERDF 368,809,731 CF 1,255,669,892 TOT. 6,673,628,245 Source: Cohesion Policy , National Strategic Reference Frameworks, p.17 26/49

28 In order to understand if and how Structural and Cohesion Funds can actually be used and can contribute in fostering development in Bulgaria, it is interesting to look at the use of pre-accession funds. Under the previous EU financial framework ( ), pre-accession assistance was delegate to three instruments: PHARE 29 /Transition facility, ISPA 30 and SAPARD 31. According to recent data published in the Report on the Status of implementation of EU funds in Bulgaria and Romania until 31 July 2009, submitted in October 2009 by the European Commission (EC) to the Committee on Budgetary Control of the European Parliament, from the budget Bulgaria has received 1,367 million euros from PHARE, SAPARD and ISPA but it was able to absorb only 488 million. The Report states that the greatest issues of EU funds absorption in Bulgaria have to do with conflict of interests, weak financial supervision and administrative capacity, and legislative flaws. The lack of administrative capacity, especially in small and medium municipalities was already revealed among other sources- in the study Bulgaria and EU funds: challenges of absorption 32. This study analyzed the relation between the size of the municipality implementing PHARE projects and their size and showed that large municipalities (over 100,000 inhabitants, which are only 22% of the total) operated 70 PHARE projects while small and medium ones (less than inhabitants, which are 78% of the total) operated only 35 projects. The study also showed that approximately 72% of municipalities had no approved projects and only 7% had 3 or more. Next to lack of administration capacity (including language knowledge), the study also revealed that small and medium municipalities suffer from scarcity of resources available (human resources, equipment, trainings, co-financing) and have a very limited interaction and cooperation with local civil society (business, NGOs, etc.) and also among them (e.g. municipalities run by different political coalitions do not cooperate among them to participate in joint projects). Finally, in Bulgaria there is also the problem of fund misappropriation. Concerning pre-accession funds, 54 cases of funds misappropriation has been revealed (20 connected to ISPA, 32 with SAPARD and 2 with PHARE). In 2008 the European Commission suspended payments under the three preaccession instruments and also withdrew the accreditation of two implementing agencies at the Ministry of Finance and the Ministry of Regional Development and Public Works after that weakness and irregularities in the management of these funds had been identified. In March 2010 the former Director of the Bulgarian State Agriculture Fund and the SAPARD Agency, Mr. Assen Drumev, was sentenced to 29 Poland and Hungary: Assistance for Restructuring their Economies. 30 Instrument for Structural Policies for Pre-Accession. 31 Special Accession Program for Agriculture and Rural Development. 32 Panayotova I., Rousseva P., Stoeva A. 27/49

29 four years in jail and also some entrepreneurs involved in misappropriation of SAPARD funds were sentenced to jail 33. The above mentioned Report on the Status of implementation of EU funds in Bulgaria and Romania until 31 July 2009, dated October 2009, also analyses the use of EU Funds in , after Bulgarian accession to the EU. The EC Report states that in Bulgaria was supposed to receive over 1 billion euros from the European Agriculture Fund for Rural Development but it has absorbed only 304 million. Bulgaria has done relatively well only with respect to the Schengen Fund, absorbing million euros out of a total of million. The Report states that, again, main risks for absorption of Structural and Cohesion Funds are conflicts of interest, no follow-up on irregularities and fraud and lack of efficient oversight in the management of funds. Looking at the last developments in 2010, it seems that things are changing and the new Government is moving in the right direction. For example, January registered a record absorption of EU funds (350 million euros), 15% higher than the highest level of absorption for 2009 (December) and nearly 20 times higher than the absorption level in January Also the nomination of the Mayor of Gabrovo, Tomislav Donchev, as Minister without Portfolio in Charge of the EU Funds in March shows hopefully- a more transparent and efficient management of the funds. Next to the ERDF, the ESF and the CF, devoted to Cohesion Policy, Bulgaria benefits (as all the other EU countries) from some other financial instruments that can have a positive influence on regional development, namely the Common Agricultural Policy (CAP) subsidies and, most important for the industrial sector, Small and Medium Enterprises development funding. Common Agricultural Policy In the agricultural sector, besides the SAPARD funds, Bulgaria benefit, as full EU member, from the Common Agricultural Policy (CAP) subsidies. CAP aims at providing farmers with a reasonable standard of living, consumers with quality food at fair prices and to preserve rural heritage. The policy combines direct subsidy payments and market support to farmers 34 (administered through paying agencies appointed by national authorities) with funds for development of rural areas 35 (distributed through programmes run by national governments). Due to a number of criticisms, the CAP has been reformed several times since its starting. For example, the 2003 reform introduced a new system of 33 The chief of the group, Mr. Mario Nikolov, was sentenced 10 years jail. 34 So called 1 st pillar of CAP. 35 So called 2 nd pillar of CAP. 28/49

30 direct payments, known as the Single Payment Scheme, under which aid is no longer linked to production. The main aim of the single payment is to support farmers incomes in return for them respecting standards of environmental protection, animal welfare, food safety and keeping the land in good condition. Farmers are encouraged to take their decisions based on market signals. The next reform will coincide with the new financial framework The agricultural expenditure is financed by two funds: the European Agricultural Guarantee Fund (EAGF), that finances direct payments to farmers and measures to regulate agricultural markets (e.g. intervention and export refunds), and the European Agricultural Fund for Rural Development (EAFRD), that finances the rural development programmes of the member states. In the financial framework more than 2.6 billion euros are allocated for rural development in Bulgaria. Small and Medium Enterprises development instruments Bulgarian SMEs or organization of SMEs can benefit from different ad hoc EU development instruments such as grants, loans and, in some cases, guarantees. Support is available either directly (EU grants) or through programmes managed at national level. SMEs can also benefit from a series of non-financial assistance measures such as business support services. Moreover, the European Commission, the European Investment Bank and the European Investment Fund have launched the Joint European Resources for Micro to Medium Enterprises (JEREMIE), a specific programme for SMEs devoted to improve access to finance for SMEs in less developed regions (all Bulgarian regions are eligible). The initiative enables member states and regions to use part of their structural funds to provide guarantees for loans as well as equity and venture capital finance to SMEs. Bulgaria will benefit from this instrument probably starting from mid 2010, after the ratification by the Bulgarian Parliament of the agreement between the state and the EIF, which was approved by Bulgaria s Council of Ministers in April Next to EU grants (direct funding) 36 and structural funds, Bulgarian SMEs can benefit also from ad hoc financial instruments processed through financial intermediaries (such as banks, credit institutions or investment funds) intended to increase the volume of credit available to SMEs and to encourage these intermediaries to develop their SME lending capacity. Under the Competitiveness and Innovation Framework Programme (CIP), in the financial framework more than 1,100 million euros has been allocated for financial instruments. The funds are organised under three schemes, managed in cooperation with the European Investment Fund (EIF) and other international financial institutions: 36 All Bulgarian SMEs, being located in Convergence regions, can benefit from direct aid for co-financing their investments. 29/49

31 1) High Growth and Innovative SME Facility (GIF) aims to increase the supply of equity for innovative SMEs both in their early stages (GIF1) and in the expansion phase (GIF2). GIF shares risk and reward with private equity investors, providing important leverage for the supply of equity to innovative companies; 2) SME Guarantee Facility provides additional guarantees in order to increase the supply of debt finance to SMEs; 3) Capacity Building Scheme supports financial intermediaries in some member states. Also at national level, present and past Governments recognized the important of SMEs in the Bulgarian economy and therefore there are a number of measures to help their development. Next to the ordinary funds (such as the National Innovation Fund), the Government launched some ad hoc measures to help SMEs hit by the crisis, such as the Programme launched in 2010 by the Ministry of Economy to offer free consulting on business recovery. 30/49

32 6. National instruments and programs for regional development in the target regions The fourth and last set of development-enabling factors here identified can be referred to as Internal Public and it includes instruments and programs for regional development that Bulgarian central and local Bulgarian public institutions finance and implement. The main strategic document for regional development in Bulgaria is the National Regional Development Strategy (NRDS) , which formulates the long-term objectives and priorities of the country s regional policy. The NRDS is the starting point for getting and distributing EU assistance for implementation of the programmes related to regional development. Following the EU recommendations for transparency and partnership, during the strategy preparation phase consultations were held with all stakeholders: ministries and institutions, district governors, NGOs active in the field of regional development. Starting with the NRDS, Regional Development Plans are designed, also according to the District Development Strategies Moreover, each region has a Regional Council for Development responsible for the implementation of the government policy for regional development at planning region level. In this legal and programmatic framework, here just mentioned, the central and local authorities can implement their actions. A recent development programme launched in June 2009 by the old Minister of Economy, Mr. Petar Dimitrov (Bulgarian Socialist Party), takes the form of the newly born state-owned company Industrial Zones 37. In the first phase of the programme, the company would develop (or re-launch) six industrial zones around the country to attract FDI (mainly in high added value sectors and processing industries as outsourcing from companies from Western Europe). The industrial zones will be developed in the cities of Russe (in BG32 Severen Tsentralen), and the above mentioned industrial zones in Vidin, Pleven, Karlovo, Svilengrad and Varna 38. Mr Dimitrov stated the new public company had received 100 million Bulgarian leva (around 50 million euros) from the state budget and it would also be funded with 10 million euros through the PHARE Program and with 200 million euros through the EU Operational Program "Regional Development". The second phase of the project plans to develop other 24 industrial zones in peripheral locations 39 to arrive up to 100 industrial zones in five years. After the election of the new Government, it is still unclear if the new Minister will follow (and how) the plan set up by his predecessor. 37 More information on 38 According to one of the two CEOs, Mr Kancho Kanchev, Chinese investors have already expressed interest in the industrial zone in Varna. 39 The Ministry of Regional Development and Public Works, Mr Rosen Plevneliev, already plans the related tenders. 31/49

33 Another policy for regional development implemented by the Bulgarian Government is the possibility for companies that invest and create jobs in highly depressed municipalities to have heavy fiscal incentives. Companies investing in areas where in the prior year the average unemployment level is at least 35% higher than the average unemployment level for the country (Fig.13) can have relieved up to 100% of the corporate income tax for the respective year. Of course, requirements that are in compliance with the European State Aid Rules must be observed. Figure 13: Municipalities with high unemployment providing opportunities for corporate tax breaks, 2009 Source: InvestBulgaria, Investor s Handbook 2009, p. 18 Finally, another incentive aimed to attract enterprises and foreign investors is the launching (or relaunching) of six operational free zones ; they are limited portion of territory, usually located on strategic trade rail, road and water trade routes that offer certain fiscal, custom and economic incentives. They six free zone are located in: 1) Vidin, around the port facility of this Danube town; 2) Russe, around the port facility of this Danube town; 3) Dragoman, near the border with Serbia; 4) Svilengrad, near the Bulgarian-Turkish border; 5) Plovdiv, including the territory of the Plovdiv International Fair; 6) Burgas, including a cargo terminal at the Burgas International Port. 32/49

34 7. Suggestions and recommendations Starting from this analysis, the outputs of this research are some suggestions on how central and regional public institutions, as well as civil society and Non-Governmental Organizations, could better use the available funds and instruments to improve the living conditions of the population in the analyzed regions. The analysis suggests that there is a need to strengthen administrative capacity to use EU funds at local level. Lack of administration capacity and scarcity of resources could be overcome with training (and ideally increased motivation). Moreover, the municipalities should work together in partnership to promote joint projects (despite different political affiliations) and, for example, big municipalities could send some of their employees to small municipalities to share knowledge and exchange best practices (secondment). Help to improve administrative capacity in the management of EU funds could also come from abroad, for example the President of the European Parliament Jerzy Buzek proposed to Bulgaria s Prime Minister Boyko Borissov to use Polish expertise to overcome difficulties connected to absorption of EU funds. Also increasing the use of national and foreign consultants could help the small municipalities to absorb more funds (less than 60% of small municipalities have used consultants for pre-accession funds, 80-90% of the big ones) 40. An interesting and useful instrument to strengthen administrative capacity to use EU funds to be further used by Bulgarian public bodies- was launched by the European Commission (DE Regio) itself, together with the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the KfW Bankengruppe 41 : the Joint Assistance to Support Projects in European Regions (JASPERS) initiative aims at assisting the Central and Eastern EU member states in the preparation of major projects to be submitted for grant financing under the Structural and Cohesion Funds. JASPERS assistance, which is provided free of charge to public administrations, is geared towards accelerating the absorption of the available funds. More precisely, JASPERS offers assistance for the preparation of high-quality projects (preferably large projects) which are eligible for support from structural funds. The assistance provided may cover technical, economic and financial aspects and any other preparatory work needed to deliver a fully developed project. Since its launch, in 40 Panayotova I., Rousseva P., Stoeva A. 41 Promotional bank established in 1948 and owned by the German federal government (80%) and the federal states (20%). KfW supports a broad range of investment projects worldwide among others in the areas of transport, environment, energy and infrastructure. To fund these projects, every year KfW raises about billion euros in the international capital markets. 33/49

35 2006, JASPERS completed in Bulgaria 15 assignments and it is currently running 50 assignments 42. One of the five offices of JASPERS in the EU territory is located in Sofia. Besides JASPERS, public bodies can also benefit from another joint initiative of the European Commission, the EIB and the Council of Europe Development Bank (CEB), the Joint European Support for Sustainable Investment in City Areas (JESSICA). This instrument is aimed at promoting sustainable investment, growth and jobs in Europe s urban areas and helps public bodies team up with partners, including private enterprises, to create funds which will support urban renewal and development projects. Strengthening administrative capacity at local level, especially in small and medium municipalities, is a key point also to avoid adverse selection in EU projects (big municipalities implement the majority of the projects and use the biggest share of the funds and small municipalities more in need- implement few small projects). Another need is to strengthen civil society at national and local level. According to the above mentioned Principle of Partnership, the European Commission and the relevant national and local authorities should cooperate during the entire process of Cohesion Policy (e.g. also providing inputs in the designing phase and not only being involved in the implementation phase). In this process strong civil society organizations could work to gather the local needs and provide these inputs to the cohesion policy process. At the moment, the Bulgarian civil society organizations are not strong nor well organized in an efficient network, but in this respect a top-down approach can not be implemented as the civil society, by definition, can not be built from the top. Nevertheless, the Government could act to improve the education system, thus a better education would increase civic sense and awareness. Another action would be the promotion of certain EU programmes for young people and NGOs (Lifelong Learning Programme, Youth in Action, etc.) aimed at promoting civic participation and awareness. Another aspect is that in Bulgaria the six planning regions are artificial institutions, with (too?) strong links with central government. Population can not vote its representatives at regional level, as they are appointed by the central Government, and therefore there is a lack of representativeness. Direct election of representatives could give a bigger accountability and strengthen the link between the population and the policy makers active in the field of regional development. 42 List available on 34/49

36 Regarding the above mentioned plan to develop dozens (up to one hundred) of industrial zones in the whole country, at first sight the idea can seem good but there are a number of factors that suggest that funds could be use in a more effective way, for example, modernizing production (Bulgaria and Romania are the most energy-intensive economies in the EU) and promoting innovation in new and existing companies (e.g. increasing use of internet for business and e-government). Using funds for education of workers, innovation in favours of SMEs and training for public servants could be a better use of funds than building industrial zones and wait for foreign and domestic companies to move there their activities. Anyway, it is still not clear if the programme launched in June 2009 by the old Minister of Economy, Mr. Petar Dimitrov (Bulgarian Socialist Party), will be actually implemented by the new Minister, Mr. Traycho Traykov. The newly born state-owned company Industrial Zones could implement the first phase of the programme, developing only the above mentioned six industrial zones and use new funds for different goals. Industrial zones are in general highly costly and due to the lack of infrastructure in Bulgaria, there is the risk they to be built in a vacuum. Moreover, they seem to be one size fits all proposal, while developmental proposals should be region-specific, taking into account regional specificities (demography, sectoral specializations, etc.). A key point for development in Bulgaria is the attraction of private operators: improving business environment and promoting EU funds among Bulgarian enterprises (direct beneficiaries) and foreign enterprises (indirect beneficiaries) would attract private funds for development, avoiding the risk of relying mainly on public/eu funds for the development of the poorest regions. The Bulgarian Government could also implement some policies aimed at using remittances from abroad for investment and not only for consumption. For example, the Government in cooperation with the main banks could establish a Credit line and a Guarantee fund for industrial SMEs whose owner is a Bulgarian immigrant willing to go back to Bulgaria or a person who is constant recipient of remittances (similar to the guarantees for loans, equity and venture capital finance to SMEs provided in the JEREMIE framework). Bulgaria should also improve research and development in the private sector: looking at the number of researchers by institutional sector, in 2006 the business sector concentrated more than 60% of all researchers in Luxembourg, Sweden, Austria, Denmark, Germany and the Netherlands while Bulgaria was the only EU country to report a majority of its researchers in the government sector (almost 60%) Eurostat yearbook 2009, p /49

37 Next to R&D, also lifelong education should be improved: according to a survey 44, in 2007 the proportion of persons aged 25 to 64 receiving some form of lifelong learning in the four weeks preceding the survey was 9.7% within the EU-27. Sweden, Denmark, the United Kingdom and Finland reported the highest proportions of their respective populations participating in lifelong learning (32%-23%) while Bulgaria (and Romania) reported the lowest rates of lifelong learning participation (less than 2%). Education in ITC is also a crucial point: results on the supply of e-skills from 2007 show that three quarters or more of the population in Denmark, Luxembourg, the Netherlands, Sweden and Germany had basic computer skills while Bulgaria registered the lowest proportion in the whole EU (32%) 45. Also in the informatization of public administration Bulgaria is lacking behind the other EU partners: if Austria is the only EU member with an online availability of 100% (i.e. all considered government services can be completely managed via Internet), the EU average is above 50% while in Poland and Bulgaria it achieves a maximum of 25% of government services fully available online 46. Not surprisingly, Bulgaria, Latvia and Romania were the only countries to report a minority of enterprises making use of e-government services. 47 To face the massive urbanization and polarization city-countryside and the correlated internal and external migration, the Bulgarian policy makers should promote job creation and growth in small municipalities (e.g. SMEs promotion) to avoid further migration in few main cities. The Government is already acting in this regard granting fiscal incentives for companies which invest and create jobs in highly depressed municipalities. Anyway, data provided by the National Statistical Institute show that at the end of 2009 there were around 7,560,000 inhabitants in Bulgaria, of which around 5.4 million (71.4%) in the cities and 2.16 million (28.6%) in the countryside. Data from the National Statistical Institute also show that negative demographic trends include the persisting ageing of the population and negative net immigration abroad (negative net migration is relatively rare among EU member states: in the period , only six countries reported negative net migration: Bulgaria, Latvia, Lithuania, the Netherlands, Poland and Romania) 48. A positive trend is the increasing of the birth rate. At the end of 2009 Bulgarian population in working age reached 4.77 million, more than 63% of the entire population. 44 Eurostat yearbook 2009, p Eurostat yearbook 2009, p Eurostat yearbook 2009, p Eurostat yearbook 2009, p Eurostat yearbook 2009, p /49

38 Improving infrastructure is also a major tool for regional development. As showed above, in Bulgaria big roads are distributed unevenly: roads connecting East-West destinations are more developed than the ones connecting North-South destinations and especially in the peripheral areas along the Northern border the road infrastructure is very poor. This pattern creates also inside the country the same centre-periphery dichotomy that exists at EU level, therefore the necessity to develop better road infrastructure is a vital need for Bulgaria. This is particularly important to support one of the main tools for regional and local development: tourism. Developing tourism, both domestic and international, could boost economic growth not only in the touristic sector itself, but create favourable conditions also for other sectors (services, construction and also some small industrial activities). Data show that municipalities with developed tourism activity have a stronger economy compared to similar municipalities with limited touristic flows, as well as that in many cases tourism absorbed workforce expelled by obsolete industrial sectors. Tourism is defined as a priority for development in the above mentioned National Regional Development Strategy (NRDS) , in all regional development plans and in the district development strategies, as well as in most municipal development plans. Bulgaria should promote its touristic destinations in new markets, not only its traditional ones (Germany, UK and Russia). Finally, Bulgaria could further develop Territorial Cooperation through the different legal and financial instruments dedicated to this aim by the European Union. An innovative legal instrument aimed to facilitate and promote cross-border, transnational and interregional cooperation is the European Grouping of Territorial Cooperation (EGTC) 49. The EGTC is a legal entity (unlike the structures which governed territorial cooperation before 2007) that can be used to enable regional and local authorities and other public bodies from different member states, to set up cooperation groupings with a legal personality. Currently Bulgaria does not have EGTC projects already in place but it has two projects under preparation: the Bulgaria-Romania EGTC on common navigation on the Danube (that will be in charge of the joint management of common navigation projects on the Danube) and the Euroregion Corridor VIII (this EGTC will be set up between Italy and Bulgaria for the above mentioned Corridor VIII, to link the Adriatic-Ionian regions with the Balkan regions and the Black Sea countries) Regulation (EC) No 1082/2006 of the European Parliament and of the Council of 5 July 2006 on a European grouping of territorial cooperation (EGTC). Adopted by Bulgarian Parliament with the Decree no 199 of 29 August 2007 on adoption of national rules on European groupings of territorial cooperation and consequent amendments. 50 More information on 37/49

39 Of course, a pre-requisite to implement the above listed policies is fighting corruption, in the economic-political system in general and in the EU funds management in particular. The new Minister in Charge of the EU Funds, Tomislav Donchev, set as his priority fighting corruption in the EU fundsrelated contracts. Under his successful administration as Mayor of Gabrovo, this small municipality was able to secure among others- more than 60 million euros of EU funds for repairing its water supply network. Now he should demonstrate to Bulgarian voters to be also a capable Minister. 38/49

40 8. Conclusions Improving living conditions of the population in the less developed regions will remain a major challenge for Bulgaria for the next decades probably. Government and civil society (business, NGOs, etc.) should work together to fully implement the actions established at policy level. Of course, development in the regions could only be associated with development at national level. In this regard, the year 2010 will be still problematic at international level and recession in its main trading/economic partners may slow down the Bulgarian growth (after a decrease of about 5% of GDP in 2009). Moreover, the debt crisis in Greece and Greek banks (which hold around 30% of the Bulgarian banking sector) may drain funds from Greek bank subsidiaries in Bulgaria, narrowing the credit offer for local enterprises. This risk could be avoided by the Bulgarian National Bank reducing minimum reserve requirements for commercial banks, in order to boost liquidity in the domestic market (mainly in favour of SMEs). Nevertheless, in order to avoid deficit, the authorities should work on the fiscal policy, as the monetary policy is constrained by the currency board. In 2010 and in the next years fiscal policy will probably remain tight, cutting some expenses and trying to lower the fiscal burden on enterprises. Need for foreign investment (that dramatically felt in 2009), especially in non-real estate sectors, and internal demand are crucial to boost economic growth. In Bulgaria exports suffer from the fix exchange rate with the euro (while other Eastern European countries such as Romania, Hungary, Czech Republic and Poland weakened their currencies against the euro) so the only way to have an interesting offer on foreign markets seems to be offer better products produced in a more efficient way (with less inputs, for example less energyintensive). As EU member state, in 2010 and the next years to come Bulgaria should work to have maximum benefits from the current EU financial framework ( ) but it should also prepare projects for the financial frameworks since now, as the design of a medium-term strategy requires some years preparation. 39/49

41 Bibliography - Balfour R., Rotta A., Beyond enlargement. The European neighbourhood policy and its tools, in The International Spectator, XL (1), Bulgarian National Bank, press release on Balance of Payments, 15 February Committee of the Regions, Strategies for promoting cross-border and inter-regional cooperation in an enlarged EU - a basic document setting out guidelines for the future, Brussels, Council of Europe, Practical guide to transfrontalier co-operation, Hooge L., Marks G., Multi-level governance and European Integration, Lanham, Rowman & Littlefield, Council Regulation (EEC) No 2052/88 on the tasks of the Structural Funds: O.J. L 185 of 15 July Dikov Ivan, Outsource to Bulgaria - EU s Chindia?, Editorial June 19, 2009 on - Ernst & Young Bulgaria, Doing business in Bulgaria, European Bank for Reconstruction and Development (EBRD), Transition Report 2008: Growth in transition - European Commission, A New Partnership for Cohesion, European Commission, European Cohesion Policy in Bulgaria, European Commission, General budget of the European Union for the financial year European Commission, News Funds, Better Rules, European Commission, Report Status of implementation of EU funds in Bulgaria and Romania, October European Outline Convention on Transfrontier Co-operation between Territorial Communities or Authorities, Madrid, 21 May European Outline Convention on Transfrontier Co-operation between Territorial Communities or Authorities Additional Protocol, Strasbourg, 9 November European Outline Convention on Transfrontier Co-operation between Territorial Communities or Authorities Protocol No. 2, Strasbourg, 5 May European Outline Convention on Transfrontier Co-operation between Territorial Communities or Authorities Protocol No. 3, Utrecht, 16 November European Union, Regional Policy, Cohesion Policy , January European Union, Regional Policy, Cohesion Policy , National Strategic Reference Frameworks, January European Union, Regional Policy, Inforegio Panorama, March /49

42 - European Union, Regional Policy, Regions An Assessment of Future Challenges for EU Regions, November European Union, Regional Policy, Regions for Economic Change, February European Union, Regional Policy, Working for the Regions, January Eurostat, Eurostat Regional Yearbook Eurostat, Eurostat yearbook Eurostat, Eurostat yearbook Eurostat Regions of the European Union A statistical portrait, Government of Bulgaria, National Strategic Reference Framework, International Monetary Fund, Working Paper 09/153, Do Workers Remittances Promote Economic Growth? - InvestBulgaria, Investor s Handbook Markova P., The Impact of the Financial Crisis on Bulgarian Migrants, European Social Watch Report Ministry of Regional Development and Public Works, Directorate General Programming of Regional Development, Operational Programme Regional Development , Mintchev V., Boshnakov V., Bulgarian Return Migration and Remittances: Alternative Estimates of Worker Remittances Inflow After 2000, - Panayotova I., Rousseva P., Stoeva A., Bulgaria and EU funds: challenges of absorption, Perkmann M., Cross-Border Regions in Europe: Significance and Drivers of Regional Cross-Border Co-Operation, in European Urban and Regional Studies, 10, Regulation (EC) No 1059/2003 of the European Parliament and of the Council of 26 May 2003 on the establishment of a common classification of territorial units for statistics (NUTS) (Official Journal L 154, 21/06/2003) - Regulation (EC) No 1082/2006 of the European Parliament and of the Council of 5 July 2006 on a European grouping of territorial cooperation (EGTC) 41/49

43 Annex Figure 14: Population density by NUTS 2 regions, Inhabitants per km 2 Source: Eurostat regional yearbook 2009, p. 15 Figure 15: Total population change by NUTS 2 regions, average Per 1000 inhabitants Source: Eurostat regional yearbook 2009, p. 16

44 16: Natural population change (live births minus deaths) by NUTS 2 regions, average Per 1000 inhabitants Source: Eurostat regional yearbook 2009, p. 18 Figure 17: Net migration by NUTS 2 regions, average Per 1000 inhabitants Source: Eurostat regional yearbook 2009, p /49

45 Figure 18: Percentage of population aged 65 years old and more by NUTS 2 regions, 2007 Source: Eurostat regional yearbook 2009, p. 22 Figure 19: Employment rate for the age group by NUTS 2 regions, Percentage Source: Eurostat regional yearbook 2009, p /49

46 Figure 20: Unemployment rate by NUTS 2 regions, Percentage Source: Eurostat regional yearbook 2009, p. 38 Figure 21: Average number of usual weekly hours of work in main job by NUTS 2 regions, Hours Source: Eurostat regional yearbook 2009, p /49

47 Figure 22: Share of part-time workers in overall employment by NUTS 2 regions, Percentage Source: Eurostat regional yearbook 2009, p. 43 Figure 23: Share of employees in overall employment by NUTS 2 regions, Percentage Source: Eurostat regional yearbook 2009, p /49

48 Figure 24 Number of nights spent in hotels and similar establishment by NUTS 2 regions, 2007 Source: Eurostat Regions of the European Union 2009, p. 50 Figure 25: Non-resident share of total nights spent in hotels and similar establishments by NUTS 2 regions, 2007 Source: Eurostat Regions of the European Union 2009, p /49

49 Figure 26 Bulgarian railway network Source: Figure 27: Bulgarian road network Source: 48/49