What Does The EU Report Say about Bulgaria and What Is It Silent About ?
After almost five years of scrutiny on the economic criteria for EU membership of Bulgaria, at the eve of the accession the monitoring report by the European Commission unexpectedly turned its focus on the political criteria.
The objective reasons for that change, that is independent of Bulgaria, its government officials and citizens, are basically as follows:
- Weariness of the enlargement and concern (especially in France) from the fact that the number of beneficiaries of subsidies from Brussels will increase, together with alienation of the European Institutions from the voters and anti-reform attitude of the political leaders from the “old” EU members;
- Inability of EU to improve on a timely basis its mechanisms for political unification, economic lagging of EU behind the USA, intensive competition from new EU members and a global pressure to which the Union fails to oppose in an inadequate manner;
- Activity and clear reform-orientated attitude of the newly elected members of the European Parliament and of Brussels administration that comes from the new EU members;
- The resources that will be left if new enlargement takes place include costs for monitoring of only two, not ten candidate countries.
Of greater importance are the internal reasons for this redirection of the attention towards the political criteria. Among them, the most important ones are:
- The Bulgarian voters after fifteen-year attempts (sometimes going extreme) to find something better on the political market, sent to the parliament a configuration of parties that cannot build an effective executive power;
- The new government was late when it began its work, and secondly, began kicking up a row and fussing around, instead of undertaking elementary measures for transparency in order to use the social opinion as a correcting tool of the internal inefficiency;
- The views of the leaders are archaic, and the moods are pro-reform towards the reforms that took place in the period 1997-2001; archaic – meaning that they come form the era of communism, and especially archaic in the sphere of justice, property rights and administrative structure of the country.
In brief, the government turned out to be a problem to itself.
The current monitoring report by the European Commission, as it is already known, is critical towards the political criteria for accession and positive to the economic development of Bulgaria. Because the economy is, fortunately, not under the direct control of the government, we can believe that the report is critical to the government but highly appreciates the efforts made by the Bulgarian citizens and the business to cope with the challenges of the accession.
The commentaries by the officials about the report are to a great extent excuses and appeals for unification of their own rows instead of suggestions of possible solutions to the stated problems.
To some degree, the action plan is already set in the report itself. Our notes below aim at assisting its reading.
As a whole, we think that the technical requirements will be completed by October but no proofs will be presented that the reforms in justice and home affairs are fruitful. This means that Bulgaria will become a EU member next year but most probably with a protection mechanism against the ineffectiveness of the Bulgarian judicial system. We believe that the real concern should address the effective protection of the Bulgarian citizens and their rights rather than the protection of the citizens of other EU members from Bulgarians. But the evaluation process is already set in that direction and it will be difficult to be redirected.
Justice and Home Affairs
“The constitutional amendments leave some ambiguities regarding the guarantees of the independence of the judiciary. Any ambiguity must be removed”
“ Intensified enforcement of anti-money laundering provisions (acquis chapter 24)”[is needed].
However, certain outstanding issues remain to be addressed. The accountability, transparency and efficiency of the justice system need further strengthening.
The above-mentioned misunderstandings are a result of the following circumstances:
- The Minister of Justice plays active role in organization of the activities of the Supreme Judicial Council and in the formation of the judicial system budget;
- The inability of the Council to define its own budget, the lack of an internal auditing system that helps the budgeting process and the lack of criteria for evaluation of the effectiveness of people that are in charge of it;
- Inadequate constitutional amendments – the phrases used and the established procedures create a suspicion of a dependence (the meaning of the words used is the same in all languages, including Bulgarian); these amendments are in opposition of the amendments that were made last year in Romania (which used to have the same critiques as the ones that showed up in March and April this year about Bulgaria);
- The base of these amendments is the reluctance of the government officials to change the place of the public prosecution in the judicial system, which is subject to the executive power; this reluctance motivates, at least formally, a submission of the whole justice system to the executive and legislative power, not de facto but in law.
The joint denominator of all these circumstances is very clear: the ruling coalition wants to use the system in the current form by its own view.
The elected prosecutor general, although excelling with his professionalism and positive characteristics, still has family relations with the government body under communism. It is well known that “the son is not like his father”, but it is also well known, by the EU observers too, that no political consensus was sought for the position of a prosecutor general.
This is an expression of arrogance, although entirely within the established set of practices. This arrogance has already played and will continue to play in the future its vital negative role during the reformation of the justice system in the country.
As for the so-called organized crime, the report in fact says that at present the government only demonstrates and boasts. The reply of the Bulgarian officials to this critique reveals basically two things:
- They repeated in the form of self-criticism the assessment by the EU experts but justified themselves by saying that the problems have been accumulating for years, “during a period of sixteen years”;
- The government makes an attempt to change its own appearance in front of the eyes of the society, but for now there is no concrete idea what can and should be done as opposition to the organized crime as well as about the ambiguity concerning the independence of the judicial system.
It is obvious that the problems are not from last year and they have been accumulating for years. But the sources should be sought not in 1990 or 1991, but many years before that:
- In appointing of bankers in the period of May 1989 – August-September 1990;
- In the parallel activities of representatives from the organs of public order and security business in the official environment.
- In the artificially maintained secrecy of the actions of these organs in the past and present which is harmful for the social confidence in the government, and in the process of destruction of archives;
- In the methods of human resources management, which have lead mainly to incompetence and mediocrity.
In these circumstances, there is a great difference between wishing and capacity. The governing coalition expresses its wish. But it sees the roots of the problems only in the above-mentioned span of time, in the democratic rules and market reforms, not in the lack of such.
However, what is going to be done is due to the pressure from the Bulgarian and international social opinion. This is one of the benefits from the experience of Bulgaria to join EU.
The non-intensive fight with the “money laundering” is maybe the only meaningless remark in the report, although it is marked as “a sphere of particular concern”.
First, the legislation system itself in this sphere is meaningless. It is based on the conception that all transactions and remittances of money over a defined sum should be under strict control. This leads to the necessity of a costly flow of information and reporting that cannot be used for the pursued objectives. The Bulgarian organs – even being the cleverest ones – cannot do anything useful with this database in exactly the same way as the EU members cannot.
Despite this, as it was emphasized by the prosecutor general, in this sphere “tangible positive results” are most easily tracked.
“Corruption continues to be a serious challenge within the justice system and this may affect the smooth and correct implementation of instruments in the area of mutual recognition. Preparations in this area need to be enhanced.”
The reaction of the Prime Minister with regard to this statement was to repeat several times in his public speech “we shall” be merciless to any form of corruption.
In a sense, such a behavior and the use of future tense is adequate because:
- He is supposed to say so;
- EU does not have any standards in this sphere, and according to external sources the country does not stand very bad according to this criterion;
- He has nothing to do except to repeat this statement before the coalition partners and ruling bodies.
There are two main problems that still stand out:
- The obvious one is whether the politicians will have the courage, authority and talent to do what they have claimed – since 1999 there were no ruling politicians that have been expelled from their positions because of corruption suspicions;
- Then comes the question whether, if this is done, the coalition will remain in place and whether a potential disruption of the coalition will delay the EU accession, despite the progress achieved.
The answer to these questions is not easy, but it is clear that doing nothing is a rational strategy. The report also states that the capacity should be strengthened and a better coordination within the anti-corruption commission should be accomplished.
Our estimates show that through programs of European Commission and the US government about 30 million euro have been spent for this purpose. The result, if any, is rather ambiguous by general consent. Most probably, there is something wrong in the system. There are some problems and system factors which have not been included in the report due to the fact that EU does not have a common single practice to address this issue – and even if it does – there are no instruments by which to enforce it:
- A main problem is financing of the political parties and their election campaigns and the follow-up accountancy, the lack of publicity in this sphere leads to a lack of loyalty of all governments after elections;
- Practices exist for lump sums government spending such as Highway “Trakia” and NPP “Belene” Projects. The public procurement procedures are illegal, non-transparent and uncompetitive – however, the EC is silent with regard to this issue;
- Already two governments have deliberately deteriorated the accounting practices and have hindered the access to information by citizens; some ministries have almost classified all information concerning programs and budget resources, the meetings of the members of parliament are not public as well. However, none of the EU reports by now have paid any attention to this “tiny matters”.
- Bulgaria is the only country in new Europe (except Ukraine and Russia, but including Albania and Moldova) where the members of parliament keep their property and the property of the executive and judicial power away from the eyes of the outside world.
Private bailiffs system
“Private bailiffs still need to become operational”
Despite the passing of the law on private bailiffs (2005) and the tariff of charges to private bailiffs (2006), the system of private bailiffs could fail to become as operational and efficient in the near future as the EU officials or we wish to. The reasons for this are as follows:
- The competence status of the private bailiffs is limited within specified regions. This is wrong because no conditions for free competition among bailiffs exist and incentives are created for private settlements and distribution of the market shares on a principle that differs from the idea “the client chooses”.
- The system of public bailiffs is still in place although it has proved its inefficiency through the years. The costs for its maintaining will continue to burden the budget of the judicial system without sufficient results to be accomplished.
- There is a tariff of the charges and fees that private bailiffs can get. However, the bailiffs are entrepreneurs like all the others and they should have the right to specify by themselves the prices for the services that they provide.
IME has many times proposed and justified the necessity of a national-wide competence status of the private bailiffs as a factor that stimulates competition, and fights against the inefficiency of the system of public bailiffs by giving greater negotiation power for all sides.
“ In view of the very high trade and current account deficits, the continuation of tight fiscal policies and measures to contain credit growth as well as moderate wage increases remain crucial .”
The current account deficit is the reason for the measures against extensive crediting that the Bulgarian National Bank and the government undertook. The restrictions by the central bank on commercial banks will loose, because the potential EU accession of Bulgaria means that banks, which are licensed in any country in EU, will have right to operate in the country and will not be treated with the same measures.
The budget surplus means that the government will continue to take away more money from the citizens than it needs to cover its expenses. Thus, it deprives people of the free choice to use and direct by themselves the resources they have produced. The tax burden hinders the efficiency of the economy, the incentives for work and entrepreneurship and the stimuli for tax avoidance and the operation in the gray economy flourish.
Privatization and industrial restructuring
“Out of a total of more than 5800 enterprises with state ownership foreseen for privatisation, the state still holds majority or minority stakes in 520 enterprises. Stakes in 74 enterprises were sold since September 2005, mostly involving minority shareholdings, but the share of privatized assets increased only slightly and remained just below 90% of all assets foreseen for privatisation. Of the larger privatisation deals mentioned in the 2005 report, only three (Boyana film studios, Varna thermal power plant and the river shipping company) were close to finalisation in April 2006. ”
The process of privatization has been considerably delayed although privatization positively affects the competitiveness of the economy. The privatization of some of the state companies is even not discussed at all because their activities are believed to be an exclusive priority of the state. Such an example is “Bulgartabac”, which is handled as a policy instrument by one of the parties in the ruling coalition instead as an operating market subject.
“In the area of administrative cooperation and mutual assistance, good progress has been made. The National Revenue Agency (NRA) became operational in January 2006 upon the entry into force of the new Code on tax and social security procedures. The NRA brought together the collection and servicing of both central government taxes (such as VAT and corporate taxes) and compulsory social security contributions (such as health insurance). The ongoing reform of the sector, in particular the successful transformation of the tax administration into the NRA, has improved the collection and control capacity, as shown by the increase in total tax collection.”
It is too early to evaluate the efficiency of the newly established National Revenues Agency, but we should mention the problems with the information system and the additional costs that were needed for the start of the agency.
The greater amount of revenues from taxes (including social security payments) cannot be attributed only to the new administration structure. It is a result of the lowered direct taxes and social security rates and the consequential reduction of the stimuli for tax evasion.
Labor market flexibility
“However, certain outstanding issues remain to be addressed. Hardly any progress has been made on removing labour market rigidities and modernising the regulatory framework, in particular as regards working time or the use of fixed-term contracts. The integration of seniority bonuses into the regular pay scale has been delayed. “
IME has constantly appealed and publicly presented its proposals for the creation of a more flexible labor market. In the context of the suggestions of EU, the ideas of the social minister Mrs. Maslarova for tying the wages in the public and private sector with a specific formula is a step backwards toward abolition of market principles on the labor market. At the same time, if the proposals by the labor unions are undertaken, a negative assessment will follow by the European Commission. The flexible labor market is a prerequisite for reduction of unemployment, stimulation of labor productivity and mobility and more efficient utilization of human capital in the economy.
The above-mentioned obstacles in the report are only a small part of all impediments that employers and employees face every day. So, the following measures should be added:
- Regulations on working time should be abolished – limitation to the working time hinders those that want to work more, and respectively, to earn more. This increases the influence power of the labor unions with regard to the terms of labor contacts and that is rarely of any help for workers;
- The procedures for hiring and dismissing of workers should be simplified – thus, the labor market will be more flexible, and more easily adaptable to the economic situation which allows greater labor mobility;
- The minimum wage rate and seniority bonuses should be abolished – the se instruments create negative side effects for the employers as well as for the employees.
- Social security rates should be reduced to 10% (or less) – thus, the labor costs for the employers will decrease; the incentives for registering the full amount of wages will increase; the share of the gray economy will fall;
- A private capital-based pension system should be introduced as soon as possible instead of the current pay-as-you-go system (PAYG) that is prone to default.
“As from January 2006, pension contributions were reduced by 6 percentage points and the share paid by the employer was reduced from 70% to 65%, thus reducing non-wage labour costs and providing incentives for job creation and moving jobs out of the informal sector.”
IME welcomes the reduction of the social security rates. For years we have been educating the general public and have justified our conclusions by quantitative research that this is one of the main steps toward higher economic growth, prosperity and freer economy. There is both a possibility and enough resources for notable reduction of social security and tax rates. We hope that at the end of the next budgeting procedure a further reduction will be set. The only matter of concern is the reaction of the employers, who could not fully see the benefits from the reform for themselves and their opposition can cause a problem for implementation of further reforms in the future.
“ Preparations for an evaluation of the effectiveness of active labor market programs have started ”
The idea of assessing the efficiency of any government program financed with money of all taxpayers is excellent.
The order of the steps, however, should be different: let’s assume that there is a problem – (1) an investigation of the causes of the problem is necessary – (2) Can the problem be solved without government intervention? – (3) if no – estimation should be made whether the benefits for the society exceed the costs for the implementation of the proposed program – (4) the expected results should evaluated – (5) full accountability and transparency of each step should be maintained – (6) after a certain period a monitoring should be made to assess whether the objectives have met or the program proves not efficient and should stop.
Up to present, we have never witnessed such a process, but even if one of the steps is undertaken, it will be regarded as an achievement by the Bulgarian administration. That is why we promote cost-benefit analysis of the government intervention and hope that the conclusions from such an analysis will be used to the purpose.
“With regard to social dialogue, the bipartite dialogue needs to be further strengthened in order to prepare the social partners for their future role in the formulation and implementation of EU social policy. The representativeness criteria have to be applied in an impartial way for all social partner organisations. Participation in the tripartite dialogue needs to be restricted to social partner organisations with a social mandate. Preparations need to be stepped up.”
At present, the Ministry Council based on the presented documents is verifying the representative character of the social partners. It will judge whether they meet the legal requirements. The problem is that the counting of the members is made solely by the organizations themselves and as such, the membership counting can be biased due to the lack of appropriate monitoring.
According to data from the last available membership counting, less than 18% of the workers regard themselves as being represented by the labor unions. Is this any representation power? In April 2006 the Ministry Counsel refused to recognize the status of the union “Promyana” and now there are only two official labor unions.
Common market organisations ( CMOs )
“Legislation has been adopted to enforce the CMO for milk and measures have been taken to put in place the milk quota as well as most of the mechanisms for the common market organisation for milk and milk products. The database including the basic quota register has been finalised, covering all producers and direct sellers; allocation of the indicative individual quota is under preparation. The process of approval of purchasers is on good track.
Detailed rules for management of milk quotas and of the national reserve have yet to be adopted. The national and regional milk boards are not fully operational nor are the independent laboratories for the analysis of fat content at all individual milk factories. The laboratories are neither installed nor accredited yet. Preparations need to be accelerated.”
The suggestions by the European Commission are rather technical and practical and the deadlines can be met if the government structures work effectively for this purpose. As a result of the introduction of the Common Market Organizations several consequences will follow on the dairy market. The small-scale and inefficient farms, that have been receiving subsidies for years, will close because they fail to meet the new EU requirements. However, the state grants have slowed down the process of restructuring in the agricultural sector. The initiation of strict quality and hygiene standards has necessitated investing in new technologies and equipment for those producers that want to comply with the new laws. But this was not possible for all farmers and as a result, the milk-processing sector will possibly face shortages of fresh cow milk that meet all EU norms. Farmers, that have accomplished to meet the standards, will win form the accession process due to the subsidies and grants they are going to receive and the enhanced demand for milk as a result of the decline in supply. Registering of the producers in special databases will make them go out from the gray economy into the official sector.
The possibility of a protective clause in the sphere of agriculture will have a direct impact on the market because the producers will not get free access to the common market and the export licenses will remain. At present, the milk-processing sector is a net exporter in the country and it is expected to further increase its export power after the accession. There are indications for a strong interest from foreign investors in the sector of food industry once the business environment is equalized by implementing the EU requirements.
Despite the fact that the agricultural sector is highly regulated via Common Agricultural Policy (CAP), which leads to market distortions, the competition within the union and rivalry from the efficient farms in EU will stimulate the economic efficiency in the sector and will enhance the labor productivity.
“ Limited progress has been made on competitiveness and the internal energy market. Increased efforts and swift action are now needed in order to complete the opening of the electricity and gas markets before accession. In the area of nuclear energy and nuclear safety, the situation has deteriorated with regard to the decommissioning process. Increased efforts and swift action are now needed to guarantee the irreversible closure of units 1 to 4 of the Kozloduy nuclear power plant .”
IME has clearly stated its position against the single-buyer model years ago and publicly defends the liberalization of the energy market, its restructuring and the abolition of government monopoly along the energy production chain – from production to trading.
The proposed steps that should be undertaken coincide with the prepositions by the EU and they are the following:
- Horizontal unbundling of the activities of production, import and export, distribution, preservation, delivery, and trading of natural gas and electricity;
- Restructuring of National Electricity Company (NEC) and Bulgargaz and privatization of the newly established companies;
- Free access for new entrants to the market and integration to the common European market – giving a competitive access to the resources and energy infrastructure is vital;
- Liberalization of the market and market establishment of prices of electricity and gas: direct negotiations should be established between consumers and suppliers– traders, distribution companies, importers.
- Deregulation of the market and where possible the sector should be left to the free market powers and principles.
The European Union, however, is silent about the grand projects such as NPP “Belene” although it is obvious that its realization will be irrational and is not based on the principles of market economy and free competition.
“The privatisation and restructuring process has continued in Bulgaria, albeit at a slower pace than planned. Privatisation is almost complete but the process has slowed down significantly recently with few privatisation measures actually terminated. The restructuring of network industries has continued. The privatisation process is still not sufficiently transparent, and problems with post-privatisation control persist.”
The privatization of all state companies should be a primary objective for the government policy – through privatization of all sectors the market will be characterized with greater efficiency in utilizing the scarce resources in the economy and the business environment will be more favorable. IME has many times criticized the process of privatization and has given concrete suggestions for evaluation of the privatization procedures and post-privatization monitoring system. The highly non-transparent rules are the reason for the failure of some privatization transactions in recent years: Bulgartabac, Bulgaria Air , etc. With the sole exception of a privatization type through the stock exchange, the access to information concerning the privatization of companies is not public – neither the privatization contracts, nor the concrete procedures and offers are accessible. The greatest number of transactions is made via negotiations with potential buyers and “competitions” which imply corruption practices in many cases.
“ The decentralization strategy aiming at further decentralizing powers and