We would fight the crisis with investments – certain failure

The news…

…from the middle of this week, is that the director of the Bulgarian Agency for Investments (BAI) was commenting the changes in the Bill for investments. These changes are a consequence from the crisis and the intention of the Government to do something to counteract it. Thus, as a result, in the proposed budget for next year is envisioned a triple increase in the money to support investments. The amount is 50 million BGN, and includes also stimulation of exports. Under discussion is that support should also be a direct subsidy and the additional funds should come besides from the budget from the Euro funds as well.  The investors would be getting administrative support for lower levels of investments as well.

Now…

…according to the Bill for encouragement of investments, the investors who have received a certificate for investment (the project must be implemented within a given period – three years and to be related to the spectral services and industry and to be above certain amount – 10 million BGN), have a lot of privileges. It is written into the Bill, that the respective competent authority could sell and constitute repressible limited right on a real estate – private state or municipal property without organizing a tender or competition. By proposal of the Minister of Economics and Energy, the Council of Ministers could provide funds for financial support of building elements of the technical infrastructure – roads, streets, water supply or waste canal networks and equipment. Funds are provided for financial support of training to obtain professional qualifications for the employees on the projects.  Besides that are appointed officials in every central and territorial administration, which provide administrative services, while all central bodies are obliged to assist the officials from the Agency to implement individual administrative services.

All these benefits and alleviations of specific market subjects and branches lead to a number of negative effects. With the increase in the allotted amount it doe not change conceptually but only deepen and again damage all participants, but to a greater extend.

The effects…

…from such policy are:

1. The Government intervention creates misbalances in the economy. This is a factor for reducing the economic activity of the entrepreneurs and could even lead to economic slow down.
2. Alleviations for some of the entrepreneurs are biasing their stimuli and de-stimulate the remaining non alleviated entrepreneurs.     
3. Thus part of the investors would pull out due to the uncertainty, the unfair play and the unequal treatment.
4. As a result of that are financed projects, which probably are not as beneficial.
5. This is shifting and redirecting the resources in the economy.
6. Artificially are attracted and directed investors towards some activities and sectors.
7. The investment is shifting to another level in order to cover the required level for assistance. 
8. In this situation the specific investor may be making profits when implementing the project, but the actual costs for the economy of the country could even be greater than the benefits.
9. If the project is economically sound, the investor could find financing and would not need the assistance from the state and its taxpayers. They would generously reward the investor after completion of the project, if he is good and not in advance and mandatory.
10. The missed benefits by spending money from the budget should not be ignored. The granted money has their alternative price.
11. The assistance, redistribution of funds and the regulations bias the natural economic activity in the country.  
12. Providing assistance is related to greater bureaucracy, which is providing the service. Thus there is a need for additional funds, with which to support even more bureaucracy. 
13. The specially created, for assistance of the "important" investors, Agency has no stimuli to improve once and for all the conditions for making business, because it would simply become redundant. It is not clear, for example, whether or not there are specific proposals for improving the business regulation by BAI, which is supposed to handle exactly the problem areas.
14. The larger bureaucracy would create conditions and prerequisites for abuse and open corruption.

The recommendations…

… which we could make are connected to the all around assistance to the private sector and not for preferential treatment of some specific group of investors and sectors. In order to attract more investors we have to increase the confidence in the Bulgarian economy. Thus the entrepreneurs would have some degree of security and expectations that they would achieve the profits which are compensating for the risks. Now the investors meet unfavorable and unforeseeable investment environment mainly due to the preferences given to some entrepreneurs.  Another important factor is that the increase itself of the private sector is a prerequisite for attracting investors for execution of profitable business.

Up until now starting a business in Bulgaria is an expensive and complicated process, due to the large number of procedures, costs and time loss. It is necessary to create better conditions for all investors. This includes decrease of the taxes and the required permissions and licenses to start and operate a business; reduction of the bureaucracy; elimination of the minimum wages; improving the quality of public services; better protection of the rights of the individual investors. During the present financial crisis only such conditions would attract the investors, which are pulling away from the increased risk in other countries.

An important condition for the natural encouragement of the investments is the economic freedom. It effects twofold – encourages the entrepreneurship and increases the investments. The report of the Canadian Frazer Institute recently showed that the investments is countries with high degree of freedom are approximately 45 times greater, than in the countries with limited economic freedom. It is a fact that the investments are very productive in the conditions of economic freedom.