BULGARIA: BIG U.S. INVESTORS DISCOVERING THAT

UNCLAS SECTION 01 OF 03 SOFIA 000810

SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SAVICH

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV BU

SUBJECT: BULGARIA: BIG U.S. INVESTORS DISCOVERING THAT
REWARDS OUTWEIGH RISKS


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1. (SBU) SUMMARY: Bulgaria is seeing increased U.S.
investment this year. Just during the week of June 5, three
major American companies -- AES, General Electric and
Hewlett Packard -- have broken ground or cut ribbons on
projects bringing well over a billion dollars and thousands
of jobs to Bulgaria. American investors, from portfolio to
direct, continue to look at Bulgaria as one of the few
"emerging markets" left in Europe. Paradoxically, at the
same time investors, bankers and analysts agree the current
government is less friendly and inviting to business than
its predecessors. The process for getting up and running
can be slow and difficult for anyone trying to work with the
government on regulatory issues, to obtain licenses, or
through privatizations or government contracts. But with
proper due diligence American investors can benefit from
this market, while at the same time their participation here
will improve business practices and ethics. END SUMMARY

INCREASED PRESENCE OF U.S. BUSINESSES
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2. (SBU) The trend over the past several years of increased
U.S. investment to Bulgaria has continued into 2006. With
AES' launch of the largest foreign investment ever in
Bulgaria, U.S. direct investment in 2006 alone will surpass
the cumulative U.S. FDI from 1992 to 2005. The following
three recently launched American investment projects show
the breadth and quality of U.S. interests here:

--AES broke ground June 6 on a $1.4 billion investment in a
670 MW lignite coal-fired electricity plant. This is the
largest foreign investment ever in Bulgaria, and the largest
energy project in South Eastern Europe.

--GE Real Estate has taken a 50 percent stake in one of the
largest commercial projects in Sofia: a $90 million, 33,500
square meter retail project. The ribbon cutting was held
June 9th.

--HP announced the selection of Bulgaria from a field of 14
competing countries for their new Global Center for Customer
Service. This will bring approximately 1,000 new
information technology jobs to Sofia over the next two
years.


3. (SBU) Bulgaria is presenting itself as an attractive
destination for a diverse variety of U.S. investments. In
addition to the three large activities that moved this week,
Tishman International is developing a 1.1 million square
foot, $84 million business park at the Sofia airport, and
will break ground in September; Alcoa is planning to
officially open their 200 person consumer products facility
(USD 10 million) in September; and Pop-Weaver Popcorn will
start their assembly line this summer. In addition,
Microsoft plans to make an announcement in early July on an
investment here, while hedge fund Grammercy Advisors is
considering increasing its already considerable portfolio
investments and diversifying into new direct ownership of
several projects.


4. (U) Bulgaria's Foreign Direct Investment (FDI)
statistics sharply underestimate the full picture of U.S.
FDI. Many American investors establish subsidiaries in
other European countries to manage their investments here as
the U.S. and Bulgaria have not yet signed a double taxation
treaty. Between 1992-2005, Bulgaria attracted USD 13
billion in FDI, according to the InvestBulgaria Agency
(IBA). Official GOB statistics for 2005 rank the U.S. as
6th in terms of overall investment in Bulgaria at USD 594
million or 5 percent of total foreign investment. However,
we calculate that number to be closer to USD 939 million,
putting the U.S. in roughly 4th or 5th place.

PITFALLS . . .
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5. (SBU) Even as foreign investors' interest in the vibrant
Bulgarian market is surging, serious disincentives remain to
be fixed. Investors, bankers, diplomats and even
professional staff within the government have pointed out
recently that the current Socialist-led government is less
business friendly than its two center-right predecessors.
Complaints revolve particularly around the difficultiesQ
foreign investors have in working with the government to
obtain permits or licenses, on regulatory issues, and in
privatizations or public procurement processes. There are

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also anecdotal reports of more blatant acts of public
corruption in the business sphere. Investors directly
dealing with private sector individuals also report
occasional difficulties, but this appears to be at rates
more commensurate with other European markets. In addition,
one career civil servant has mentioned to us that non-
Russian foreign investors seem to be disadvantaged in the
current administration.


6. (SBU) Other difficulties for foreign investors include
Bulgaria's low labor productivity, energy inefficiency and
low Internet penetration. Some of the other key impediments
to investment in Bulgaria are:

--Bureaucratic delays, including the need for numerous
licenses, and onerous permit processes;
--Perception of petty and high-level corruption by
authorizing officials in tenders, licenses and permit
procedures;
--Practice of government/judiciary or other officials
reviewing contacts already signed;
--Ineffective rule of law, especially in the judicial
system, means investors do not have adequate recourse to the
court system for enforcement of contracts, intellectual
property rights, and judicial decisions;
--Insufficient development of financial intermediation
adversely affects access to credit, especially for small and
medium businesses;
--Infrastructure needs massive upgrading, especially roads,
railroads and ports;
-- Low wages, although attractive as a low cost of labor,
mean consumer purchasing power is low; and
-- Lack of strong project managers.

. . . BUT ALSO CLEAR POTENTIAL
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7. (SBU) Despite these drawbacks, business opportunities
are increasing and the outlook for further FDI inflows
remains encouraging. First quarter 2006 FDI is estimated at
Euro 755 million - a healthy amount for this small economy.
The prospect of Bulgarian membership in the EU continues to
attract foreign firms as it leads to regulatory improvement
and legislative reform. Bulgaria has great FDI potential as
a manufacturing platform for export to the EU based on its
relatively cheap, but skilled, work force. And a recent
survey showed growth potential in several areas: services,
apparel production, banking, the food and beverage industry,
pharmaceuticals, steel production, and retail trade. But
with privatization coming to an end, the pool of inexpensive
talent running dry, and the challenge of increased
competition from other FDI destinations, the GOB needs to
increase efforts to improve the investment climate with the
goal of attracting even more global investors.

A CASE IN POINT
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8. (SBU) The saga of the U.S. film company NuImage's battle
to purchase and privatize the government's film studio is an
example of how tedious, but potentially rewarding, it can be
to do business here. It has been over a year snce the
Privatization Agency decided NuImage's ofer to privatize
the studio was the best of the three contenders, and almost
ten months since the government and the company signed the
contract. Constant "moving the goal posts" by various
government players involved has delayed the finalization of
the project, and added to concerns that Bulgaria is a
difficult place to complete a deal. Without active and
aggressive advocacy by the Embassy in this case - and for
AES - none of the projects would have gotten as far as they
have. Despite the difficulties, however, NuImage continues
to insist this is the deal and the place for them to develop
their studio, indicating that the eventual return on their
investment here will far outweigh the problems they have
incurred so far.

COMMENT
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9. (SBU) Looking at the FDI trends, other investors clearly
agree with the NuImage risk-benefit calculation. We are
seeing a noticeable upswing of interest in Bulgaria from
U.S. investors. Some projects are coming to fruition after
years of negotiations, while others seem to pop up like
mushrooms after the rain. We are encouraged by the

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increasing presence of American businesspeople here, who we
feel will help both of our economies and transfer much-
needed American-style business practices and know-how to
this emerging market. As long as investors arrive with eyes
wide open and undertake sufficient due-diligence as to their
partners and the overall environment, we say "keep `em
coming." Increased American investment will help raise the
level of business standards and ethics at the market level,
and strengthen the Embassy's hand in lobbying the government
for systemic change that can marginalize the shady
operators' advantage here.

BEYRLE