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Business process outsourcing & system
support activities in Bulgaria:
Opportunities for US companies, comparative analytical study
Draft for the Silicon Valley Conference
September 2004
InvestBulgaria Agency
www.investbg.government.bg
Summary

This presentation examines Bulgaria, Romania, Hungary, and Poland
as alternative locations for software outsourcing, large scale support
services operations and business process outsourcing

The analysis focuses on three key factor groups impacting
performance:
 Business environment stability and predictability
 Productivity based on labor force cost and skill base
 Infrastructure and partner support

The analysis uses latest data from the following official sources:
Eurostat, IMF, World Bank, European Central Bank, EBRD, KPMG. Data
used from individual government sources is indicated

The presentation also provides more specific info about Bulgaria and a
review of the Bulgarian ICT sector
InvestBulgaria Agency
www.investbg.government.bg
Methodology of the country comparative overview
Stability and predictability
Productivity & cost
Infrastructure and
partner support
1.
GDP growth sustainability
1.
Qualifications
1.
Broadband
2.
GDP growth drivers
2.
Wages
2.
Power supply
3.
Purchasing power
3.
3.
Logistics
4.
Corporate taxation
Employer
contributions
4.
Local support
5.
Currency risk impact
6.
Inflation impact
4.
Hidden costs
 The “hard factor” methodology linked to direct costs is expanded by two more sets
of factual evidence available upon request

“Soft factors” including confidence of investors expressed in volume of foreign direct
investments and country investment rating

Ad-hoc analysis of political stability, governments track record and EU progress
InvestBulgaria Agency
www.investbg.government.bg
1. GDP growth sustainability
Average GDP growth 1999-2003
GDP growth 1999-2004E
5.0%
6.0%
5.0%
4.0%
4.2%
4.0%
4.0%
3.8%
Hungary
Poland
2.8%
3.0%
3.0%
2.0%
2.0% Bulgaria
1.0%
1.0%
Romania
0.0%
0.0%
1999
2000
2001
2002
2003
2004
Bulgaria
Hungary
Romania
Poland
Source: EUROSTAT
 Bulgaria leads in terms of average sustained GDP growth
 Significance for a US investor's business: GDP growth is best indicator of near term
visibility
InvestBulgaria Agency
www.investbg.government.bg
3. Purchasing power versus cost to employer
Growth of GDP per capita at purchasing power standards (1999 – 2004E)
25.0%
600
23.3%
21.1%
€488
€535
Growth of GDP/Capita
15%
400
15.0%
300
€177
10.0%
200
€147
5.0%
100
Avergage monthly salary,
end of 2003*
500
20.0%
1.9%
0
0.0%
Bulgaria Romania
Poland
Hungary
* As of Oct for Hungary
Source: EUROSTAT
 Bulgarian and Romanian population grew their purchasing power standards significantly more and
faster than Poland over the past 5 years due to different economic models
 At 2-3 times lower salary levels, Bulgarians and Romanians can now acquire more goods and services
in their home economies than Polish
 a US investor's employees in Bulgaria and Romania will continue to enjoy better life standards at lower
nominal salaries over the medium run (5-10 years)
InvestBulgaria Agency
www.investbg.government.bg
2. GDP growth drivers
1999-2003 average real contribution to GDP growth
Bulgaria
Poland
Romania
6%
4%
2%
0%
Private Consumption
-2%
Fixed Investment
Source: EUROSTAT, EIU
Consolidated government debt as % of GDP
Budget deficit 1997-2003
2%
-1%
1997
1998
1999
2000
2001
2002
2003
-4%
-7%
120%
90%
60%
30%
0%
a
ari
g
l
Bu
-10%
Bulgaria




Poland
Romania
1997
H
ry
ga
n
u
la
Po
2003
nd
R
ia
an
m
o
Hungary
Investment and consumption fueled growth in Bulgaria at factor of two times the other countries
Poland, Hungary & Romania maintained high budget deficits to sustain growth while Bulgaria was at near 0%
Bulgaria grew while reducing debt by over 50% while the others increased debt further
For a US investor, growth drivers and growth funding are key to assessing economic stability in the future
InvestBulgaria Agency
www.investbg.government.bg
4. Corporate taxation
2004 and stated 2005 corporate tax rates
2004
2005 (gov. program)
30%
25%
25%
23%
19%
20%
16%
15%
19.5%
15%
15%
10%
5%
0%
Hungary
Poland
Bulgaria
Romania
Source: KPMG, Government budgetary programs
 Bulgaria has a lower corporate tax rate than Romania
 Nominal tax levels are equally important with the government’s ability to keep stated tax policy
 For a US investor, lower tax levels and tax policy predictability have direct impact on
profitability
InvestBulgaria Agency
www.investbg.government.bg
5. Currency risk impact
Currencies index fluctuation to Euro (May 2003-April 2004)
110
PLN/€
HUF/€
105
ROL/€
100
BGN/€
ril
Se
Ap
t
pt
em
be
r
O
ct
ob
N
ov er
em
be
D
r
ec
em
be
Ja r
nu
a
Fe ry
br
ua
ry
M
ar
ch
gu
s
ly
Au
Ju
ne
Ju
M
ay
95
Source: European Central Bank
 In the 12-month period May 2003-April 2004, the average monthly exchange rate of
the PLN, HUF and ROL changed respectively by 4.9%, 5.4% and 4.6% on average
 The lev is pegged to the Euro and is not subject to currency risk
 a US investor would have no cost in terms of currency hedging or risks in Bulgaria
InvestBulgaria Agency
www.investbg.government.bg
6. Inflation exposure
Inflation rates (2000 – 2003)
50%
40%
30%
20%
10%
0%
Bulgaria
Poland
2000
2001
Hungary
2002
Romania
2003
Source: Eurostat
 Inflation is significant source of risk exposure to real growth and profit expectations
 Bulgarian, Polish and Hungarian economies have curbed inflation; inflation level
remained high in Romania
 a US investor would have significant exposure to lower stability and visibility in
Romania
InvestBulgaria Agency
www.investbg.government.bg
7. Education
95%
92%
Net enrollment rates
Number of higher education
High education - students /
in secondary education
students per 100,000 inhabitants
teaching staff ratio
4,641
5,000
91%
25
90%
3,506
4,000
86%
20
2,938
85%
80%
2,736
3,000
15
80%
2,000
10
75%
1,000
5
70%
0
Hungary
22
20
Poland
Bulgaria
14
15
0
Romania
Poland
Bulgaria
Hungary Bulgaria Romania
Hungary
Romania
Poland
Source: Global Education Digest - UNESCO, National Statistics Institute (academic year 2001/2002)
Source: Global Education Digest, European Center for Higher Education (UNESCO), Academic year 2002/2003
Bulgaria
42
36
Poland
Hungary
19
7
36
32
OECD Average
0%
20%
2
Social sciences, business & law
37
56
7 1
53
Engineering, manufacturing &
construction
Computing
3
52
Other subjects
13
40%
60%
80%
100%
Source: OECD statistics (academic year 2001/2002)
 Levels of secondary and higher education in the three countries is comparable (no data for Romania)
 Bulgaria has a larger proportion of students enrolled in the key 3 fields
InvestBulgaria Agency
www.investbg.government.bg
8. Salary levels
2003 eoy monthly gross salary comparison (€)
Average
salary (€)
ICT
premium
% social security
ICT
Company
adjusted paid by the employer
cost
Hungary 535 (Oct.03)
40%
749
29%
966
Poland
488
40%
683
22.72%
838
Romania
177
40%
248
38% to 45%
342 to 360
Bulgaria
147
50%
221
32.2%
292
Source: Eurostat (for average salary levels), KPMG (for social security contributions)
 Bulgaria and Romania have salary levels at 27% to 33% compared to Hungary
 ICT industry employees are likely to earn up to 40% above average country salaries;
50% estimated for Bulgaria
InvestBulgaria Agency
www.investbg.government.bg
9. Hidden costs
2003 Corruption Index scores from 10 to 1
(with country ranking in parenthesis)
12
10
9.7
7.5
8
6
4.8
3.9
4
3.6
2.8
2
0
Finland (1) USA (18)
Hungary
(40)
Bulgaria
(54)
Poland
(64)
Romania
(83)
Source: Transparency International
Source: EBRD, BEEP survey
 “Time tax” paid in dealing with public administration by company managers is
approximately 10% in Poland and Romania, 7% in Hungary and 4% in Bulgaria
 Hungary has the lowest level of corruption from the four countries followed by Bulgaria
InvestBulgaria Agency
www.investbg.government.bg
10. Infrastructure
Key infrastructure parameters
ITU Digital Access
Index 2002*
Power outages
2003
Flight time
to Munich
Budapest
0.63
No
1.15 h
Warsaw
0.59
No
1.35 h
Sofia
0.53
No
2.0 h
Bucharest
0.48
No
1.54 h
*Source: ITU survey December 2003
 Budapest, Warsaw and Sofia are classified in the upper access group; Bucharest is
in the medium class group
 No major power outages occurred in the four cities in 2003
InvestBulgaria Agency
www.investbg.government.bg
11. Local support
Support to ICT companies in Bulgaria by IBA in 2004
Investor
(country)
Status pre IBA support
Project
Current status
American Standard
(USA)
Manufacturing site with
4,000 employees
Expansion of
European IT support
25 jobs to be
created in June
Business Park Sofia
(Germany) – City
Call (Belgium)
400-500 seats
contact center
Expansion to
2,000 seats
Office
construction in
progress
SAP Labs
(Germany)
180 software
development team
Developer and tester
recruitment
Recruitment in
progress
TaxBack
(Ireland)
Service hub supporting
18 offices worldwide
Expansion of office
space and people
Negotiations
with schools
 IBA is presently assisting foreign investors involved in expansions including over
2,000 technology and support jobs
 Site development support, staff recruitment and training are included in the
assistance programs of the Bulgarian Government as part of its ICT priority strategy
InvestBulgaria Agency
www.investbg.government.bg
IBA’s project pipeline in ICT services
Ongoing discussion on potential projects in Bulgaria
Company description
Timing of inquiry Project description
Technology/Service
Global mobile
communications leader
Apr-04
R&D
Telecom networking
Global networking leader
Mar-04
National research network
Broadband
Top 3 global IT solutions
provider
Oct-03
Software development
Systems Integration
Top 3 EU mobile network
solutions provider
Apr-04
Offshore demand center
Systems services
Top 3 EU electrical
engineering and
electronics solutions
provider
Nov-04
Software development
Medical
Strictly confidential
InvestBulgaria Agency
www.investbg.government.bg
Bulgaria: country specific information

Foreign direct investment development

Technical and language education

Operational cost
InvestBulgaria Agency
www.investbg.government.bg
Record FDI in 2003, continuing into 2004
FDI inflow in Bulgaria 1995-2004F, USD m
FDI stock by country 1998 - 1H 2004
Total USD 6.8 bn
2500
2000
1,419
1500
1000
500
Greece
16%
Other
20%
2,000E
636
163
819
1,002
620
905
813
USA
4%
901
Jun‘04
256
Austria
13%
Cyprus
4%
Switzerland
5%
0
1995
1996
1997
1998
1999
2000
2001
Greenfields, additional FDI, reinvestm ents
2002
2003 2004E
Privatisation
Expected
Belgium &
Luxembourg
Hungary
6%
6%
* Privatization of Bulgarian Telecommunications Company was finalized in June 2004
1400
Germany
7%
Netherlands
9%
FDI stock by sector 1998 - 1H 2004
Total USD 6.8 bn
1st half FDI, 2000 – 2004, USD m
1198.6
Other
1200
Finance
9%
1000
21%
Utilities
2%
Tourism & Real
723.8
800
578.1
600
400
Italy
10%
estate
6%
443.7
285.8
Trade
200
Manufacturing
18%
25%
0
1H, 2000
1H,2001
1H, 2002
1H, 2003
1H, 2004
Telecom
Source: BNB, Invest Bulgaria Agency
InvestBulgaria Agency
www.investbg.government.bg
19%
Highly educated, English-speaking workforce
350 secondary technical schools
15% of the population has university degree
Technical degrees obtained at 17 universities
110 CISCO academies in the country – in 2003
Bulgaria won 2 of 6 world CISCO annual awards:
“Best project” and “Best student”
Year 2003 university enrolment:
 7,500 students in computer sciences
 3,600 in communication technologies
 800 in maths
 4,200 in electrical engineering, electronics and
automation





Number of students in universities, colleges and secondary
technical schools, technical sciencies and IT
73,570
36,444
4,343
2000/2001
Secondary technical school





4,039

7,500
4,651
2001/2002
2002/2003
Technical college
University-TS
English:
German:
French:
Spanish:
Italian:


English:
German:
French:
Spanish:
Italian:
University-IT
InvestBulgaria Agency
www.investbg.government.bg
1,369 students
639 students
482 students
236 students
124 students
GENERAL SECONDARY EDUCATION

37,085
3,848
UNIVERSITY LANGUAGE BA/MA EDUCATION

77,102
72,017
Academic enrollment,
2003/04
429,000 students
119,000 students
71,000 students
16,000 students
4,500 students
Bulgaria - most competitive cost base in Europe
Property
cost
/per sq. m/
 Office rent, class A, Sofia
 Office purchase price, Sofia centre
 Industrial property rent prices, large cities
 Industrial construction works cost
 Office building
 € 9 to 17
 € 700 to 1,400
 € 3 to 5
 € 250-300
 € 350-500
 Corporate tax rate 19.5% (15% in 2005)
Tax

0% in areas of high unemployment for manufacturing activities
 VAT exemption for equipment imports for investments over € 5 million
 Personal income tax 29% highest bracket (monthly income over € 300)
 0% capital gains tax
InvestBulgaria Agency
www.investbg.government.bg
Bulgaria: competitive ICT industry

Stable legal framework

Rapidly developing infrastructure

High value added software industry

Contact centers booming
InvestBulgaria Agency
www.investbg.government.bg
ICT industry: Legal and regulatory framework

IPR protection in place

Law on copyright and related rights (1993- last amnd. 2003)

Patent Act (amnd. 2003)

A new law on telecommunications provides for the full liberalization of
the telecom market by 2005

Law on Electronic Document and Electronic Signature (2001-2002) –
secure conduct of e-commerce

Law on the Protection of Personal Data (2002) – human rights
protection in line with the EU norms

Classified Information Safeguarding Act (2002-2003)

Convention on Cyber Crime of the Council of Europe ratified
InvestBulgaria Agency
www.investbg.government.bg
Broadband infrastructure availability (BTC)
Bulgarian digital
telecommunications
network (2003)
InvestBulgaria Agency
www.investbg.government.bg
Alternative fiber optic networks

Bulgargaz:
 650 km developed (mainly in Southern Bulgaria)
 Connectivity with Turkey and Romania
 Cooperation agreement signed with the cable operator Cabletel

National Electric Company:
 200 km developed (out of 1,000 km planned)
 Sofia and Plovdiv already connected

Cabletel:
 Currently working on the Southern part of a 1,800 km national optic line
ring that is expected to be ready by 2005
 Mobiltel developing the Northern part of the ring – to be ready in March
2005; Siemens is the main contractor for this project
 Connectivity to Greece will be in place in July; Romania, Turkey, Serbia
and Macedonia will follow
InvestBulgaria Agency
www.investbg.government.bg
€ 1.2 billion buoyant telecom market
OPTICAL TRANSMISSION NETWORK (km)
DIGITALIZATION ('000 of lines)
3,500
3,000
2,575
2,536
2,500
2,480
3,000
3,000
2,333
2,617
2,078
2,500
2,000
2,114
2,000
1,799
1,840
1997
1998
2,188
1,500
1,500
1,000
500
779
258
346
433
573
1,000
500
0
0
1999
2000
Digital lines
2001
2002
2003
1999
2000
2002
Analogue lines
Source: Bulgarian Telecommunications Company



Fixed lines cover 85% of the households; 80% digitalization by 2008
Full telecom liberalization by Jan 2005
Telecom privatization complete in 2004; investor committed a full network upgrade
InvestBulgaria Agency
www.investbg.government.bg
2003 E
Bulgarian software industry review
•
Bulgaria is the leader in the field of outsourcing among the countries in
East Europe ← Latest research of CIO and Meta Group
•
Bulgarian software companies develop the expert specification together
with the client, provide smart solutions and meet the deadlines within
the initial budget
•
Bulgarian software developers have a wide expertise in:

Sophisticated information systems

Gaming solutions

Industry knowledge and solutions

Web design

Network security services & solutions

Complex B2B solutions

E-business and wireless applications

Embedded software

Geographic Information Systems

CAD/CAM

Rapid Prototyping Systems

Multimedia
•
Key markets of the Bulgarian software industry – the US, Canada,
Germany, France, UK, the Netherlands, Austria, Italy, Japan, China
•
ESI Centre in Bulgaria since 2003
InvestBulgaria Agency
www.investbg.government.bg
Software development:
skill availability & cost efficiency





20,000 IT professionals
3,000 IT university
graduates per year
3rd worldwide IT certified
professionals per capita
1st in Tokyo math Olympics
(2003)
2 gold medals in US math
Olympics (2003)
€ 515 average monthly salary
in the IT sector
Annual salaries for software developers:
CEO €18K - €24K
 Project leader €15 - €18K
 Senior developer - €12- €15K
 Developer €4K- €8K

InvestBulgaria Agency
www.investbg.government.bg
Case study: SAP Labs in Bulgaria

100% SAP-owned

180 people in Sofia

J2EE application server platform

Fastest growing subsidiary of SAP worldwide

SEE Investor of the Year 2004

Plans for expansion in 2004
InvestBulgaria Agency
www.investbg.government.bg
Case study: Tumbleweed – US leading provider of
secure Internet messaging software in Bulgaria
 Tumbleweed Communications Bulgaria:
 Since 2002: leading provider of enterprise solutions in the areas of
anti-spam, anti-virus, e-mail filtering, and e-mail encryption
 more than 600 enterprise customers
 Currently employs approximately 60 people
 After selling operations in Bangalore, India announced expansion of
existing business operations in Sofia, Bulgaria by 50% by the end
of 2004
 Will employ 90 people by the end of 2004
“Over the past several years, we have proven that Bulgaria is a competitive, productive place to do
business with a lot of talented and well-trained people. As we look to expand here in Sofia, we plan to
continue hiring the best and the brightest people that Bulgaria has to offer.”
Eric Dumas, Director of Tumbleweed Communications Bulgaria
InvestBulgaria Agency
www.investbg.government.bg
Bulgaria: a highly competitive location
for contact center business

11 contact centers in Bulgaria – mainly marketing and technical
support

Main foreign companies having a contact center in Bulgaria:
American Standard, Hewlett Packard, City Call - Belgium, Tax Back Ireland

Countries serviced from Bulgaria - USA, Canada, Australia, New
Zealand, Japan, Ireland, UK, the Netherlands, Belgium, Germany,
Italy

Languages to be actively supported from Bulgaria – English,
German, French, Spanish, Italian, Russian

Average company cost:
 EUR 300-470 for contact agents
 EUR 550-650 for supervisors
InvestBulgaria Agency
www.investbg.government.bg
Case study: City Call, Belgium
→ IMRO, Bulgaria

Initial investment of € 500,000
– Survey made Sep - Nov 2002
– Bulgarian company set in Dec 2002
– Operation stared in April 2003
– 300 phone operators employed June 2003

Office in Business Park Sofia; 2 MB line provided by BTC Net

Contact center activities – marketing + help desk

Languages used: French and Dutch - customers from Belgium & France
are served

Salary ratio 6:1 compared to company similar facility in Belgium

Established local partnerships with the French language programs of the
major Sofia universities and colleges

€ 5 million will be invested & 2,000 jobs will be created in 2004-2005
InvestBulgaria Agency
www.investbg.government.bg
Case study: Taxback - Irish tax refund service
support center
 Taxback: call and service center in Varna, Bulgaria

2001: 150 employees

2003: 265 employees

24 Hour Tax Advice in 6 different languages

Bulgarian Taxback people developing/training new business operations of
Taxback in Russia and Spain
 Taxback globally:

18 offices worldwide

Income tax refunds for all nationalities that have worked in the USA,
Canada, the UK, Australia, New Zealand, Germany, Ireland, the
Netherlands and Japan to customers all over the world

120,000 tax returns per annum
Skilled labor force (oriented towards excellence of service) was the key
factor for Taxback to establish the Bulgarian office.
InvestBulgaria Agency
www.investbg.government.bg
Why Bulgaria: conclusions

Best investment credibility in the region

Success story quotes

National commitment for encouraging foreign
investment
InvestBulgaria Agency
www.investbg.government.bg
Sound economic fundamentals make Bulgaria
preferred site to other SEE :
A constantly growing investment credibility:

LONDON, June 24 (Reuters): “Bulgaria had its foreign currency credit
rating raised to investment grade on Thursday by Standard & Poor's,
opening the door for more investors to buy the country's bonds

"The upgrade reflects the country's bright economic prospects and
prudent fiscal policies. Bulgaria's improved creditworthiness is
supported by its high growth potential, prudent fiscal policies, and
European integration”, Moritz Kraemer S&P credit analyst
BBB-
Bulgaria Fitch Rating Track

Aug 2004 Fitch also gave
an investment-grade
upgrading Bulgaria's longterm foreign currency
rating to BBB- with a
positive outlook
BB+
BB
BBB+
B+
17-Apr-1998
21-Sep-2000
14-Jan-2002
InvestBulgaria Agency
www.investbg.government.bg
29-Oct-2002
24-Jul-2003
4-Aug-2004
Bulgaria delivers cutting edge solutions in ICT from a
proprietary platform
The testimonials:

“Forget India – Let’s Go to Bulgaria”, Business Week, March 2004:

“It was access to nearby talent that convinced SAP to set up its Bulgarian
outpost…” BW, March

“Scattered around the capital are hundreds of small software companies doing
projects for an impressive list of the biggest customers in the world, including
Boeing, BMW, General Motors, Siemens, Nortel…” BW, March

“Other giants, such as SAP and Computer Sciences, have local labs in Sofia…”

“There is an exceptionally high level of talent in Eastern Europe”, Kasper
Rorsted, Managing Director for EMEA at Hewlett-Packard Co.

“The combination of existing and proven local expertise, the excellent academic
facilities and the strength of the Bulgarian economy, made Sofia an ideal choice
for further investment in our global mixed-signal engineering capabilities.”
Nelly Pergoot, Managing Director, AMI Semiconductor Bulgaria
InvestBulgaria Agency
www.investbg.government.bg
Administrative business-friendly environment

Wide public support for the National strategy for encouragement of investment created by Ministry of Economy

Ministry of Economy responsible for investment policy making

InvestBulgaria Agency, part of the Ministry of Economy, assists
investors set up business in Bulgaria through:






Informational services and individual administrative services
Consulting
Marketing research
Sector analyses
Business contacts
Linkages with the central and local government institutions
facilitating investment projects implementation
 Investment marketing
InvestBulgaria Agency
www.investbg.government.bg
New Law on investment promotion – Aug 2004






Equal treatment of Bulgarian and foreign investors
Preferential treatment for manufacturing or service providing
investment projects, creating employment – implementation
required within 3 years
3 classes investments according to project value:
 1st class - over € 50 mln
 2nd class – between € 25 - 50 mln
 3rd class - between € 5 - 25 mln
All classes benefit from speeded-up administrative service as well
as information service
Individual administrative services for 2nd and 1st class investors
Infrastructure support to the borders of the investment project
site together with facilitated land acquisition for 1st class
investors
InvestBulgaria Agency
www.investbg.government.bg