Bulgaria, it seems, is in good shape. Fueled by a buoyant tech sector, the country’s economy is registering impressive growth, incomes are rising, and unemployment is down. Still, with corruption still a problem and the prospect of a global slowdown around the corner, few are willing to bet on the good times sticking around long. As always, in the Land of Roses, the thorns are not far away.
Lifting Off from the Airport
The ongoing privatization of the Sofia International Airport is the primary subject du jour for Bulgaria’s leading commercial lawyers. Valued by many experts as worth well over EUR 3.5 billion over 35 years, the concession should result in a long-overdue upgrade to one of Europe’s most outdated and least attractive airports.
The airport is, obviously, the gateway into the country for an ever-increasing number of investors and tourists, as the arrivals – which exceeded six million for the first time in 2016 – continue to grow. It is thus both politically and symbolically important, as well as being a source of significant income to the Bulgarian state and to the firms advising various bidders. As a result, the announcement of the successful bid – the initial February 4, 2019 deadline for submitting bids was, at the urging of the IFC, pushed back to April 3d – remains highly anticipated.
“There is huge interest in the airport concession,” reports Pavel Hristov, Managing Partner of Sofia’s Hristov & Partners. “Especially in light of the successful concession of the Belgrade airport in Serbia in 2018 [which went to French infrastructure group Vinci for EUR 1.5 billion and 25 years], it seems like investors are looking for similar opportunities.” Indeed, referring to “all-year round tourism and the previously-successful concessions of the two airports by the seaside,” Hristov believes that the potential for the airport concession in Bulgaria’s capital is even greater than it was last year in its Serbian counterpart.
Optimism is, happily, not emanating solely from the airport. Diana Dimova, the Managing Partner of Kinstellar’s Sofia office, agrees that “these are very interesting times because of the privatization process,” which she describes as “the biggest project the country has seen in recent years,” but she insists that her confidence extends beyond that particular project. According to Dimova, she and her colleagues at Kinstellar Sofia “had a great 2018, and 2019 will be even better.” She points in particular to “the many transactions in the real estate, TMT, financial services, and manufacturing sectors.”
Separating spin from the truth in this context is as difficult as separating toadstools from mushrooms, but many lawyers appear to share Dimova’s confidence. “I’m positive on the market generally,” says Richard Clegg, the Managing Partner at Wolf Theiss Sofia. “There’s lots of development in the tech sector, and lots of institutional and alternative funds coming in, particularly at the early venture capital end.” He continues, smiling. “There are lots of larger international tech companies coming, providing a lot of outsourcing and back office work. That’s good for wage growth and career prospects. It’s a very exciting tech ecosystem in Bulgaria, and a reason for young people to stay in the country.”
Indeed, if there’s one thing everyone agrees on, it’s that Bulgaria’s tech sector is doing extremely well. Borislav Boyanov, the Managing Partner at Boyanov & Co., claims the tech sector is especially advanced in the country, describing it as a good ten years ahead of many of its CEE peers, and he describes the FinTech sector in particular as “the most advanced in the region.”
And Pavel Hristov says, “IT is booming in Bulgaria and it has excellent potential, because the most important resource – human capital, in the form of capable engineers and developers – are here in the market.” Indeed, he says, “they are still here despite the brain drain, because they are a particular breed, looking for quality of life.”
But technology is not the only source of growth. Hristov says that he is “hearing from Turkish law firms that they are hearing more and more interest from Turkish companies to invest here, and Richard Clegg reports that investors wanting to avoid problems in both Turkey and Greece are increasingly looking at their shared neighbor to the north. In addition, he says, “in some ways, Trump’s position on global trade has had a positive impact for Eastern Europe – threats of a trade war between Asia and the United States have made companies look again at the comparative security, low-cost, and ease of business in Eastern Europe.”
Boyanov, however, is less convinced. Although he agrees that “from Greece we have investors, particularly in the southwest part of the country,” he is less optimistic about business coming from Turkey. “We expected that on joining the EU lots of Turkish investors would come,” he says, shaking his head. “A few did, but not many. Not many.”
Either way, Pavel Hristov is enthusiastic about the commitment of Bulgaria’s government to investing in the country and supporting business. “The government has been running the show for ten years now and has a clear focus on EU-funds-related investments,” he says. “We were underdeveloped in infrastructure for many years, and although it’s still not enough, we have made huge investments in roads, rails, concessions and also logistically in some of the industrial centers.” As a result, he says, the current government is “pro-business for sure.”
Indeed, Hristov notes that the concessions offered for the airport and recently for the ports “helps business and we can now export easier.” For him, the next step is to ensure a “consistent and uniform application of the rules.” He explains: “We have good quality laws and most are completely aligned with EU legislation. This gives an opportunity to all business from the EU to come here and feel comfortable. The next step is that we need to enforce these rules consistently. Not just in the courts, but also by enforcement bodies, municipalities, and so on.” Simply put, he says, “the state, after investing in infrastructure, needs to invest in the people to develop the capacity of enforcement – so that the investors feel more secure here.”
Boyanov too believes that providing foreign investors with increased transparency, predictability, and confidence in the security of their investments is key. “The main problem is a non-functioning judiciary. This provides no reliability for investors. This is the most important part. Of course, there are other reasons, but that’s the main one.”
The Future: Whistling Past the Graveyard?
Nobody believes the current good times (whether extremely or only sort-of) will last forever, but there seems to be little anxiety that the well will dry anytime soon. “A recession is probable, given the economic cycle,” says Wolf Theiss’s Richard Clegg. “But Bulgaria is still growing from a comparatively low base and I don’t expect a significant slow-down in the next two years.” He cites his firm’s recent advice to the Soravia Group on a financial lease of some three million square meters of land on the site of the former Kremikovtzi steel mill to the south of Sofia as a source of optimism, noting that “the development plan is to build for large logistics, commercial, and infrastructure companies, which would provide a significant employment boost.”
Kinstellar’s Dimova says “when you hear the government boasting of lower unemployment, greater investments, and salaries and incomes going up, you have to believe it – the economy is growing.” And like Clegg, she cites a major deal her firm worked on in 2018 – the acquisition of Old Mutual Property and its Bulgarian partner AG Capital of Megapark, a 75,000-square-meter office building in Sofia, which she describes as “the largest office acquisition in Bulgaria since 2008” – as underscoring her confidence.
And Borislav Boyanov believes that, even if the anticipated slowdown in the global economy does occur, Bulgaria is unlikely to be immediately affected. “Usually the crisis comes a year or two later here,” he says. Still, he’s alert to the likelihood it will come, in some form or another. “Nobody knows what form it will take, exactly, and when,” he says. “Maybe this year, maybe next year. Everybody says the next crisis that’s coming will be different – but nobody knows how. But something’s coming.”
More critical, for him, at least in the short-term, are the country’s internal problems. “There’s political tension,” he says. “Too much is going on in a bad direction here. Many foreign investors have left the country.” He notes that in the past decade the country has slipped from 6th or 7th in FDI per capita to 58th, and that, over the past two decades, the population in the country has shrunk by 30%.
Damiam Simeonov, at Boyanov & Co., expresses disappointment that Bulgaria has failed to take better advantage of the opportunities it has had in recent years. Still, his colleague Boyanov is quick to insist that he and his colleagues “remain optimists, as the civil society and the new generation of business people are growing and becoming stronger.”
The Only Thing Constant is … No Change
Bulgaria’s legal marketplace is characterized by a remarkable stability, with the same four or five firms remaining atop it for many years, and few successful mergers or split-offs of note. Richard Clegg, commenting from his position at regional Wolf Theiss, says the current situation can not last forever. “There will be a generational change at the largest Bulgarian law firms over the next few years,” he says, “which will present an opportunity for the next generation of leaders, but also a challenge as firms make that transition.”
According to Clegg, “despite general optimism, the legal market is challenging as work-quality, technology, and sophistication demands increase together with a pressure for fees to decrease.” He notes that “like other sectors, the best talent is in demand,” which means “there is a great opportunity at the moment for entrepreneurial mid-level lawyers to spin-out and do good work.”
Borislav Boyanov, whose Boyanov & Co is among the long-time kings of the market, expresses weariness at the continued pressure on fees in the country, which he says are already the lowest in CEE. Lawyers aren’t the only one affected, he says, describing it as also “not good for clients.”
And Pavel Hristov expresses some frustration that several of the biggest deals in the private sector in Bulgaria last year had only limited local Bulgarian elements. He points to the acquisition by OTP Bank of Societe Generale’s Albanian and Bulgarian subsidiaries as being “initiated, done, and completed outside of Bulgaria mostly,” and says “only a few law firms had a chance to participate on that.”
Hristov adds that “the silver lining is the Sofia airport concession.”
Editor’s Note: After this article was published Borislav Boyanov contacted CEE Legal Matters to point out that it is incorrect to describe the concession of the Sofia Airport as a “privatization,” as, in his words, “in Bulgaria [this] is a different legal concept.” We appreciate the correction, and we apologize for the error.
This Article was originally published in Issue 6.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
