REVIEW AND ANALYSIS OF THE EXTERNAL ASSISTANCE TO SME DEVELOPMENT IN BULGARIA

I. Main Trends¹

1.1. Volumes and trends in external assistance for SME development

The review of external assistance for SME development in Bulgaria draws the conclusion that there was substantial increase in volume, with annual fluctuations of the disbursements under programmes and projects completed or under implementation in the period 1998 - 2002. As it can be seen on Table 1, the disbursements under projects in support to SMEs amounted to 66.6 million US dollars in 1998, 57.1 million US dollars in 1999, 59.4 million US dollars in 2000, 80.1 million US dollars in 2001 and 118.2 million US dollars in 2002 (preliminary data). The total disbursements for the period 1998 - 2002 reached 381.5 million US dollars. The analysis of the trends in disbursements has shown that the volume decreased by 14.3% in 1999 when compared to 1998 disbursements. In 2000 it increased by 4.0 %; in 2001 - by 34.8 % and in 2002 - by 47.6 % from its level in previous year.

Figure 1. Main trends in external assistance to SME development in Bulgaria, disbursements for the period 1998-2002

Commitments and disbursements under the programmes and projects of donors are important indicators of the volume of official external assistance for SME development in Bulgaria. This review shows that 155 external assistance programmes and projects were either completed or in the process of implementation to the benefit of SME development in 1998-2002. Especially for the period 2001-2002 ongoing were 103 projects of Donors. The total commitments under these programmes and projects amounted to 729.8 million US dollars.

1.2. Sources of financing (by Donors and Donor institutions)

The external assistance source of financing SME support in Bulgaria is formed by a group of 26 donors composed of 16 bilateral and 10 multilateral donors in the period 1998 - 2002. In spite of fluctuations in some years, a balanced and almost equal volume of disbursements by multilateral and bilateral donors under projects in support to SME development was observed. The ratio between disbursements under bilateral and multilateral assistance programmes and projects was 42.8% to 57.2% for the whole period of 1998 - 2002 (for more details see Table 2).

Leading donors for SME support are considered those who implemented projects with total disbursements over 10 million US dollars in 1998 - 2002. The group of leading donors includes EBRD, United States of America, European Union, FR Germany and IFC of the World Bank Group.

Figure 2. Leading donors in external assistance to SME development in Bulgaria, in thousands of US$, for the period 1998-2002

1.2.1. Multilateral Donors

The total disbursements in support to SME by multilateral donors were 218.3 million US dollars in 1998 - 2002.

European Union is one of the leading provider of multilateral assistance in support to SMEs in 1998 - 2002 and is ranked on the third place for the period under review with a share of 14.3% of the total disbursements under external assistance of SME development. The support is provided mainly through EU Phare Programme. The disbursements under the Programme's projects amounted to 10.8 million US dollars in 2000. They were increased by 9.3% in 2001 and reached 11.9 million US dollars, but in 2002 they amounted to 4.8 million US dollars only (preliminary data). The total disbursements under EU project and programmes in 1998 - 2002 was 54.6 million US dollars. Most EU projects were in the sector "Assistance to system of SME support services". EU had a substantial contribution in the other sectors and in almost each and every sector and sub-sector there were important EU programmes aimed at creating prerequisites of strategic importance, instrument and institutions of sustainable SME support. Among them are the projects for strengthening the national network of business centers and incubators for SMEs and for certification under ISO quality standard, which were considered of great importance for Bulgarian SMEs. These programmes and projects proved the strong EU commitment to support effectively SMEs in the period of Bulgaria's preparation for membership in the Union.

The European Bank for Reconstruction and Development (EBRD) is the leading donor for SME development with disbursements under its programmes in the amount of 107.3 million US dollars in 1998 - 2002. With its share of 28.1% in the total disbursements under programmes and projects in support to SMEs, EBRD is ranked on the first place for the period under review. EBRD projects were concentrated almost entirely in the sector "Facilitation of SME financing" and its contributions to subsectors "Support through banking institutions" and "Support through non-banking institutions" were almost balanced (for more details see Table 2). EBRD is among the donors most actively applying modern forms for reliable financing and lending to SME sector. Along with its equity participation in five local private banks, EBRD participated in four venture capital funds working with SMEs. Through its programmes "Business Advisory Services (BAS)" and "Turn-around management", the Bank provides useful and integrated assistance for increasing the competitiveness of medium size enterprises.

The disbursements under projects of the International Finance Corporation (IFC) from the World Bank group amounted to 26.3 million US dollars during the period under consideration. By its share of 6.9% of the total disbursements, it was the fifth donor contributor to SMEs in Bulgaria. All its projects were in the sector "Facilitation of SME financing". They include significant investments in two venture capital funds and in a leasing company.

The International Bank for Reconstruction and Development (IBRD) support to the Bulgarian Fund for Regional Initiatives made it the seventh important donor supporting SME development in Bulgaria. The disbursements under its projects amounted to 8.6 million US dollars or 2.3% of the overall disbursements under donors' assistance to SME development in 1998-2002.

The United Nations Development Programme (UNDP) was also among the important donors that supported traditionally SME sector in Bulgaria. Disbursements under its projects amounted to 8.2 million US dollars in 1998 - 2002. It is however necessary to stress that UNDP was executing important projects financed by other donors. Its assistance was in three subsectors: "SME training support"; "SME consultancy support" and "SME support services institutions".

The European Investment Bank (EIB) - by providing a specialized credit line for SMEs long-term lending in Bulgaria, became also an important donor. With disbursements of 8.0 million US dollars and a share of 2.1% of the total disbursements under external assistance, the Bank ranks ninth among all donors.

Among the other multilateral donors, that supported SMEs in Bulgaria were the Council of Europe Development Bank (CEDB); United Nations Industrial Development Organization (UNIDO) and United Nations Education Science and Culture Organization (UNESCO).

1.2.2. Bilateral Donors

Bilateral donors implemented various projects in support to SMEs in 1998 - 2002. Disbursements under their projects amounted to 163.1 million US dollars. This figure represents 42.8% of the total disbursements under external assistance projects and programmes in SME support.

The United States of America is the largest donor among the bilateral and the second among all donors supporting SME development in Bulgarian in 1998 - 2002 according to the level of disbursements. US share of the total disbursements was 22.1% and amounted to 84.4 million US dollars. US assistance to SME sector is provided mostly through the United States Agency for International Development (USAID) activities. US offers a comprehensive support to SME development and to the private sector in general. The assistance was provided in all sectors and sub sectors. There were 7 USAID projects with important role for establishing legal framework and raising public support to SMEs in Bulgaria at national and local levels. USAID provided financial and expert assistance to four important projects aimed at strengthening the system of SME support services as well as four projects in facilitating SME financing and two projects on increasing sector's competitiveness.

FR Germany provided a diversified support directly aimed at SMEs need. With a total disbursements of 43.9 million US dollars or 11.5% of the total disbursements, FR Germany was the second largest bilateral donor and fourth among all donors supporting SME development in Bulgaria in 1998 - 2002. Among the 33 projects implemented with German support there were 20 important projects aimed at strengthening the system of SME support services. Six projects were aimed at facilitating SME financing and two - at improving export competitiveness and SME internationalization. Another two projects were implemented in support of the establishment of legal framework and state policy regarding SMEs.

The Netherlands is sixth among the donors supporting SMEs in Bulgaria with disbursements of 8.7 million US dollars and a share of 2.3% in 1998 - 2002. A substantial part of its assistance was aimed at strengthening the system of SME support services and their export competitiveness.

Switzerland was the tenth biggest donor supporting SME in Bulgaria with total disbursements of 7.9 million US dollars and a share of 2.1 % in 1998 - 2002. The Swiss support to SMEs was provided mostly for the improvement of export competitiveness and SME internationalization and for strengthening the system of SME support services. Significant part of the Swiss support was concentrated in selected regions through comprehensive and practically oriented programmes.

With a share of 1.6% of the total disbursements amounting to 5.9 million US dollars, United Kingdom ranked eleventh among all donors to SME development. Important project was implemented with UK support for strengthening the system of SME support services, for export promotion and improvement of state policy to SME development.

Total disbursements under projects, supported by Japan were 5.9 million US dollars during the period under consideration. Support provided by the Japanese assistance programme was significant in improving the services to SMEs and strengthening state institutions capacities to support SMEs.

Austria with its share of 0.5% of the total disbursements under external assistance to SME development, Belgium with 0.4%, Italy with 0.3%, France with 0.3% are also among the bilateral donors supporting SMEs in Bulgaria. Other donors like Canada, Sweden, Denmark, Spain, Israel and Cyprus also provided assistance to SME in the period under review.

1.3. External assistance to SME development by terms of assistance

The analysis of external assistance to SME development in Bulgaria by terms of provision allows to conclude that a trend has occurred since 1998 of gradual decrease of the share of grants (mostly for technical assistance projects) to the benefit of concessional loans. The ratio between disbursements under grants and concessional loans was 53.8 : 46.2 for the whole period of 1998 - 2002.

Disbursements under grants amounted to 42.6 million US dollars in 2000, to 40.5 million US dollars in 2001 and to 39.1 million US dollars in 2002. In sectors "Establishment of legal framework and state policy in support to SME development", "SME export competitiveness and internationalization" and "System of SME support services" (with a single exception) all external assistance was provided as grants. The share of grant assistance in sector "Facilitating SME financing and borrowing" was 17.0%. The remaining part of the assistance under this sector was provided as loans with concessional terms. In 2002 the share of loans amounted to 66,9% in total Disbursements.

Figure 3. External assistance to SME development in Bulgaria by terms of assistance, in thousands of US$, for the period 1998-2002

1.4. External assistance to SME development by sectors and sub-sectors of support

External assistance to SME development in Bulgaria was directed in four main sectors of support. The sector "Facilitating SME financing and borrowing" was the leading among them with a share of 49.9% of the total disbursements. Sector "System of SME support services" was the second one under this indicator in the period under review with a share of 35.2%. The share of sector "Establishment of legal framework and strengthening state policy in support to SMEs" was with 9.9% share and sector "SME export competitiveness and internationalization" - with 5.1%.

Figure 4. Distribution of external assistance to SME development in Bulgaria by sectors of SME support, in percent for the period 1998-2002

In the total amount of disbursements, the sector "Facilitating SME financing and borrowing" was the largest. In this sector under 23 programmes and projects, 190.2 million dollars were disbursed in 1998 - 2002, which was 49.9% of the total disbursements. Sector "System of SME support services" was the second one under this indicator in the period under review with 134 projects and disbursements of 134.3 million US dollars and a share of 35.2%. The share of sector "Establishment of legal framework and strengthening state policy in support to SMEs" was 9.9% with 17 programmes and projects and disbursements of 37.6 million US dollars. The disbursements under sector "SME export competitiveness and internationalization" were 19.3 million US dollars in 1998 - 2002. The disbursements share of this sector in the period under review was 5.1 % with 18 projects implemented (for more details see Table 3).

Assistance support for facilitating SME financing was channeled in two sub-sectors. A larger share was disbursed in sub-sector "Facilitating of SME banking and borrowing". The disbursements amounted to 110.9 million US dollars or 29.1%. The remaining disbursements were made in sub-sector "Support to SME non-bank financing" or 20,8%.

External assistance under sector "System of SME support services" was delivered in three subsectors. "SME consultancy support" had the biggest share at 22.0%. Sub-sector "SME training support" also had a significant share at 8.1%. The share of sub-sector "SME support services institutions" was 5.1 % during the period under review.

External assistance for the establishment of legal framework and state policy support to SME development was provided in two subsectors in 1998 - 2002. Disbursements reached 17.5 million US dollars under projects in support to national institutions during the period under review. Under programmes in support to local authorities, predominantly to municipalities, 20.1 million US dollars were disbursed.

External assistance in sector "SME export competitiveness and internationalization" was provided under three subsectors. Disbursements in sub-sector "Support to SME export competitiveness" amounted to 12.1 million US dollars in 1998 - 2002 or 3.2% of total amount. The share of subsector "Support to SME joint venture and industrial cooperation" was 1.5%. Under the projects implemented in subsector "SME export promotion" the disbursements reached 1.4 million US dollars and its share within the sector's total disbursements was 0.4%.

The analysis of the volume and trends of external assistance for SME development in Bulgaria, leads to the conclusion that there was a redirection of donors priorities from establishment of institutional framework for SME development towards more direct support to Bulgarian SMEs. As it can be seen on Table 4 (available only in Bulgarian) more than 40 programmes and projects of Donor institutions for direct support to Bulgarian SMEs were active in the middle of 2002.

II. Main recommendations in attracting future external assistance for SME development in Bulgaria

One of the main objectives of this study is to allow for better co-ordination among donors and the state institutions responsible for SME development; to maximize the effect of disbursed money to the SME sector, and to avoid overlapping between donor's activities and funding.

For this reason concrete support was provided to the Agency for Small and Medium-sized Enterprises (ASME) in organizing a "Co-ordination meeting of the donors, the public administration and the NGOs, supporting the Small and Medium-Sized Enterprises (SME) sector in Bulgaria", held on 18.06.2002 in Sofia in the frame of the project (for more details see Annex 2). On the basis of Presentation of the preliminary results of this Report on "Review and Analysis of External assistance to SME development in Bulgaria 1998-2001" (see Annex 2.4.) a special attention during this Co-ordination meeting of the donors, supporting the Small and Medium-Sized Enterprises (SME) Development in Bulgaria was paid to the formulation of the future priorities in attracting external assistance for SME development in Bulgaria. The Agency for Small and Medium-sized Enterprises (ASME) prepared together with the authors of this Study a Draft of the document "Main priorities of the Agency for Small and Medium-sized Enterprises (ASME) in attracting external assistance for SME development in Bulgaria", which was sent to all Donor institutions, based in Bulgaria a week before the Co-ordination meeting. On the ground of active discussions during the meeting and of additionally sent written proposals of Donors, ASME approved the final version of this programming document for the coming three years.

The main recommendations in attracting future external assistance for SME development in Bulgaria can be grouped by the four sectors of support.

2.1. Legal framework and public policy supporting SME development

2.1.1. Over the past several years the Bulgarian legislation concerning SME development has been approximated to EU standards. This, together with the existing administrative capacity for its implementation, give sufficient grounds to recommend that the external assistance to SMEs in Bulgaria could be shifted gradually from this area to others, such as providing integrated support services, facilitating access to financing, promotion of competitiveness, and internationalisation of the Bulgarian SME sector. At the same time, there are areas where little or no assistance has been provided and they require future support.

2.1.2. Assistance to development of the co-ordination and information capacity of the ASME, required for implementation of its legally defined functions will be valuable.

2.1.3. Institutional support to the ASME for the introduction, development and management of a national guarantee fund for SMEs; of micro-credit initiatives; of grant schemes for financial support to start-ups and others will allow the needed financial strengthening of Bulgarian SMEs.

2.1.4. Development by the ASME with Donor support of fiscal and other related incentives to support SMEs will be very valuable.

2.1.5. Development of national public service standards and performance monitoring mechanisms with the assistance of Donors to be adopted in public sector institutions - in order to improve public service delivery to the private sector and to SMEs in particular will have substantial importance.

2.1.6. Assistance to municipalities for capacity building in the area of regional planning with special emphasis to SME Development; investment promotion to SMEs; development of effective public-private partnerships.

2.2. System of SME support services

2.2.1. The experience acquired until now, as well as the capacity built, are suitable prerequisites for the establishment and efficient functioning of a comprehensive system of support services - required and adapted for each stage of development of SMEs in Bulgaria. Ensuring reliable and effective services to SMEs at the regional and sector levels should be an important component of this system.

2.2.2. External support for management training should focus on building sustainable entrepreneurial culture. The quality of university management programmes has to be ensured through accredited training institutions in these areas (universities, departments and even individual courses). Postgraduate, distance learning, continuous and in-company training oriented towards solutions of SME problems also deserve support. Donors with vocational training support programmes may contribute substantially to the renewal of equipment in the existing training centres, and to upgrade skills of trainers and quality of education.

2.2.3. Support to further professional consulting of SMEs in the fields of management, technological renovation, export marketing, project financing and others, provided mainly through Business Centres, Branch Associations is another area where external donor assistance is feasible and welcome.

2.2.4. Special attention should be paid to professional consulting support on encouraging the technological renovation of industrial SMEs. SMEs could be further supported in developing technological ties with universities, research institutions, technological centres and future High-Tech parks.

2.2.5. The external assistance for the introduction of ISO 9000:2000 quality management standards in Bulgarian enterprises and for the quality certification of their products needs special attention by donors.

2.2.6. The national network of business centres and incubators, mainly within the Regional Development Agencies, could play a key role in providing integrated and certified support services to SMEs. High-tech parks are expected to mobilise the national intellectual and technological potential, thus providing sustainable access for SMEs to needed technologies.

2.2.7. External support for strengthening the capacities of branch associations would help build sustainable information and consultancy services for SMEs in particular branches, providing assistance for start-ups, for co-ordinated enhancement of the competitiveness - especially on international markets, of whole SME clusters in specific regions and branches.

2.3. Facilitating SME financing and borrowing

2.3.1. More active and extended future support by external donors, mainly by International Financial Institutions, is feasible in the form of opening new long-term credit lines with lower interest rates and other facilitating conditions to SMEs, serviced by Bulgarian banks.

2.3.2. A suitable form of financial support to SMEs is the introduction, development and management with external assistance of national guarantee scheme for SMEs; micro-credit institutions; grant schemes for financial support to start-ups and other initiatives - already developed as concepts by ASME.

2.3.3. Specific conditions of SMEs development in Bulgaria make the establishment and functioning of specialised investment funds - supported by donors, for SME equity financing a very effective way of assistance. It is important that these funds broaden and diversify their scope of activities.

2.3.4. Based on its success in other Central and East European countries and the needs of SMEs in Bulgaria, future donor assistance may be recommended in the field of creating specialised leasing companies supporting acquisition of machines and equipment by SMEs.

2.3.5. The Pre-Accession funds and projects of the European Union, which include a grant element for SME's investment projects, will have substantial importance for future financing of SMEs in Bulgaria. Those opportunities require information and consultancy support for the more efficient participation of Bulgarian SMEs in the different EU Programmes.

2.3.6. The need for external support to professional consulting services on development of feasibility studies and business plans required in the process of SMEs financing is growing.

2.4. SME export competitiveness and internationalisation

2.4.1. A larger external support to the national business associations such as BCCI, BIA, BARDA, and others for improving their capacity for consulting and supporting SMEs in their export efforts and in establishment and maintaining of closer business contacts with foreign partners is needed.

2.4.2. Future donor support to Bulgarian SMEs for exhibiting their products in international fairs and exhibitions, especially when they are organised at the level of national participations, will be valuable.

2.4.3. Assistance to the Bulgarian Export Insurance Agency - especially for strengthening its financial potential to issue more effective and extended export insurance policies supporting SME exports will be important.

2.4.4. Donor support is needed for the establishment of a National Information System on industrial and technological potential of Bulgarian SMEs - to be used together with foreign partners mainly for assigning sub-contracting and sub-delivering contracts to SMEs in Bulgaria.

2.4.5. Support to the efforts of the Bulgarian Foreign Investments Agency (BFIA) to attract foreign partners and investors in concluding corporate arrangements for production and technological co-operation with Bulgarian SMEs will be highly appreciated.

2.4.6. Further support to the activities in Bulgaria of Donors' Government Agencies for promotion of investments abroad and of Government Agencies for export promotion in order to support inter-firm co-operation with Bulgarian SMEs and development of joint investment and joint ventures in Bulgaria is required.

2.4.7. Programmes on SME export competitiveness enhancement need to be expanded, mainly by donor support to exporters in particular branches and regions. Development of mid-term national Strategies and Action plans from the Branch Associations is feasible in order to attract foreign partners and external assistance for their implementation.

2.4.8. The scope for additional external assistance to SMEs should further be explored, especially for assistance in concrete branches and "clusters of SMEs" - taking into account the positive results of the projects already implemented in Bulgaria by a number of leading donors in those fields.