Bulgaria: Selected Issues Paper


Bulgaria: Selected Issues Paper

Bulgaria—State-Owned Enterprises in a Regional Perspective1

A. Introduction

1. State-owned enterprises (SOEs) play an important role in Bulgaria’s economy. They are especially important in network industries, such as energy, water management, and transportation. The purpose of this paper is to shed light on Bulgaria’s SOE sector and to assess its performance in a regional perspective. A detailed and rich firm-level dataset of state-owned and private firms was compiled for this note to compare key performance indicators of SOEs to private firms in the same sector and to similar firms in Croatia and Romania for a regional comparison.2

2. The main findings of the analysis are as follows:

  • In some network industries, such as energy, SOEs are heavily loss-making. Large amounts of debt have been piled up notably in the energy and transport sectors which, to the extent that it is classified outside the general government accounts, can pose significant risk to public finances in the form of contingent liabilities if the SOEs run into financial difficulties.

  • SOE profitability and resource allocation efficiency largely lag private firms in the same sectors, even when isolating SOEs engaged in competitive market activities and hence classified outside of general government. Coupled with comparably poor output quality, these challenges have the potential to impair competitiveness and productivity across the economy.

  • Corporate governance of SOEs is perceived as weak in Bulgaria, pointing to substantial room for institutional reform, mainly in the areas of the SOE ownership policy, financial oversight, and professionalizing SOE boards. Bulgaria would also benefit from a more structured dividend policy, such as broad guidelines or pre-defined pay-out ratios, similar to peer countries.

  • Taken together, these findings highlight the importance of improving the financial performance, efficiency, output quality, and governance of SOEs.

3. The remainder of this paper is organized as follows. It first sets the scene by reviewing the broader SOE landscape in Bulgaria, Croatia and Romania. It then assesses the profitability and efficiency of SOEs compared with private firms in the same sectors, with a focus on the Bulgarian energy and transport sectors. Lastly, the paper discusses SOE governance issues in the context of international best practices and proposes policy recommendations for Bulgaria.

B. The Role of SOEs–Some Stylized Facts

4. The analysis of SOEs is based on a rich firm-level dataset, which was constructed for this paper using the Orbis database provided by Bureau Van Dijk. The data represent the most recent picture currently available, referring to end-2014. After cleaning for inactive companies, outliers and double entries, the maximum number of observations amounts to 171,883 companies for Bulgaria, out of which 782 are state- and municipality-owned;3 32,627 companies for Croatia (176 SOEs); 262,022 firms for Romania (679 SOEs). Although the coverage of the Orbis database is extensive, it cannot be regarded as fully exhaustive, so the presented aggregate figures of SOE activity should be understood as indicative. The available 4-digit NACE-2 sectoral identifiers are aggregated into eight economic sectors.4

SOE dataset

article image

5. The SOE landscape is characterized by a large variety of entities. SOEs vary in size from small local entities with only a few employees to large-scale companies, notably in the network industries. The chart illustrates the diversity of SOEs in Bulgaria, in comparison with Croatia and Romania. Overall, healthcare entities make up a large share of SOEs and of SOE employment in Bulgaria while services, water utilities and other industries are more prominent in Croatia and Romania. For output and value-added, however, the typical network industries – energy and transport – as well as mining cover the largest part of SOE activity in all three countries.


Sectoral breakdown of SOEs, Bulgaria


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.

Sectoral breakdown of SOEs, Croatia


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.

Sectoral breakdown of SOEs, Romania


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.

6. SOEs have an important weight in Bulgaria’s economy.5 Aggregating over all sectors, SOEs contribute 4.9 percent to total employment, 6.9 percent to total output and 4.7 percent to gross value-added in Bulgaria. This compares roughly to the figures for Croatia while ranging significantly above those for Romania. Subtracting the healthcare sector from Bulgaria’s figures – as it includes largely state and municipal hospitals that are not encoded as SOEs in the Croatia and Romania datasets – facilitates cross-country comparison.6 As a result, Bulgaria’s contributions fall mainly in terms of employment (down to 3.0 percent) and value-added (down to 3.5 percent), while the contribution to output is still at 6.0 percent due to high labor intensity and presumably non-market pricing in the medical profession. This still ranges above the 2 percent average employment share of SOEs in countries which are members of both the EU and the OECD (OECD, 2012).


Share of SOEs in the economy

(Percent of total)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis, Eurostat; and IMF staff calculations.

Share of SOEs in economic sectors, Bulgaria

(Percent of sector total)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis, Eurostat; and IMF staff calculations.

Share of SOEs in economic sectors, Croatia

(Percent of sector total)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis, Eurostat; and IMF staff calculations.

Share of SOEs in economic sectors, Romania

(Percent of sector total)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis, Eurostat; and IMF staff calculations.

7. In network industries, SOEs play a dominating role. SOEs have a significant presence in the energy sector in Bulgaria and Croatia while being less prominent in Romania. SOEs in the water and mining sectors make important sectoral contributions in Bulgaria and Romania, less so in Croatia. The transport sector features an SOE employment share of more than 20 percent in Bulgaria. The prominence of SOEs in Bulgaria’s healthcare sector, however, is due to a different legal basis of hospitals and medical centers compared to peer countries.

C. Performance of SOEs

8. Assessing the financial performance of SOEs is not straightforward. While many SOEs operate in a market environment, others are constrained by public service obligations, characterized by natural monopoly conditions, or set up as administrative institutional units. Those non-market firms are typically less able to generate profits and to compete successfully against private companies. For that reason, they tend to be classified in fiscal accounts as “general government units” while SOEs operating in competitive markets are classified as “public corporations”, outside the general government sector. The distinction is made annually on the basis of a “market test” in line with Eurostat’s government debt guidelines, determining whether an SOE’s operational revenues cover its operational costs by at least 50 percent. To facilitate the analysis and enable a meaningful comparison with private firms, Bulgaria’s public corporations, i.e. its “market SOEs” outside of general government are reported separately in the following charts.7

9. Energy SOEs recorded substantial losses in Bulgaria but large profits in Croatia.8 In 2014, Bulgaria’s National Electricity Company (NEK) alone accounted for an operational loss before tax of 0.7 percent of GDP which was only partly compensated by profits of other energy companies. By contrast, the energy SOEs in Croatia managed to generate a substantial profit of 1.0 percent of GDP in the same year, based on cost-efficient hydro power and low energy input prices. Moderate profits were recorded in Bulgaria’s transport and mining SOEs while other sectors showed minor losses. Among the transport sector, four SOEs are classified within general government – including the loss-making railway passenger service and infrastructure companies. Excluding these firms results in slightly larger aggregate profits of Bulgaria’s transport SOEs. Croatia’s SOEs yielded positive results in postal services, other services and other industries. In Romania, notable profits were generated in the mining, transport and energy sectors.


Aggregated profits/losses of SOEs

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis, IMF WEO; and IMF staff calculation.* SOEs classified outside general government

Aggregated liabilities of SOEs

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis, IMF WEO; and IMF staff calculation.* SOEs classified outside general government

10. Bulgarian and Croatian SOEs account for large liabilities in selected sectors.9 The Bulgarian electricity company NEK and its parent company BEH hold liabilities of around 4.2 percent of GDP. Additional debt by nuclear power, heating and gas companies contribute to the overall energy SOE liabilities of 8.6 percent of GDP. Excluding the debt of the radioactive waste company – the only energy-sector SOE included in general government accounts – reduces the aggregated debt of the sector slightly. The difference between SOEs within and outside the general government is more striking in the transport sector, given that the two railway SOEs within general government account for liabilities of 2.6 percent of GDP. In Croatia, outstanding liabilities are on account of the national electricity company HEP (“energy”), the Zagreb Holding company – a conglomerate that also operates water, electricity and transport services (“other services”) – as well as various highway development and maintenance companies (“other industries”). To the contrary, Romania’s SOEs have not accumulated liabilities of comparable size. While the debt of SOEs classified as general government units is explicitly accounted for in fiscal accounts, the debt of public corporations, i.e. SOEs outside general government, can imply significant risk to public finances through contingent liabilities (see Box 1).

SOEs and Contingent Liabilities

Contingent liabilities from SOEs pose potential risk for Bulgaria. Aggregated firm-level data from Orbis indicate a total amount of liabilities of SOEs outside general government of 13.9 percent of GDP in 2014. This number is similar to national accounts data from Eurostat which state an amount of 13.4 percent of GDP in the same year. As of 2014, Bulgaria’s contingent liabilities exceed those of peer countries (see graph) and, if triggered, would be a considerable burden for Bulgaria’s public finances. While Croatia reduced its contingent liabilities significantly between 2013 and 2014, and Romania achieved a small reduction, Bulgaria’s contingent liabilities increased during the same period.1


Total outstanding liabilities of government entities classified outside general government

(percent of GDP)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Source: Eurostat.

In historical perspective, the share of SOEs in the Bulgarian economy has decreased, hence reducing contingent liabilities over the years. Enterprise restructuring started in the 1990s, when SOEs accumulated large losses and arrears. In order to break the inter-enterprise chain of arrears leading to accumulation of tax arrears, the government implemented a strategy to recapitalize enterprises and thus enabled them to pay suppliers (typically the gas and energy public monopolies), which would in turn pay tax and social contributions arrears to the budget. In order to limit moral hazard, this operation was available as a one-off option at the time of privatization.

State guarantees could drain public finances and hamper economic activity. While their size in Bulgaria is currently not significant (0.01 percent of GDP in May 2016), some of the main beneficiaries – like the railway company BDZ – have been incurring losses and accumulating arrears to their suppliers. Arrears to suppliers may have contributed to the rise of nonperforming loans of the banking system.

1 In Romania’s case, around 70 percent of the reported contingent liabilities in 2014 stem from arrears to the government, so the fiscal risk from the contingent liabilities is considerably lower. In Bulgaria, however, the liabilities are largely due to the private sector, so the contingent liabilities do reflect fiscal risks.

11. SOEs in all three countries tend to be less profitable than private companies, partly due to public service obligations. The return on equity (ROE) measures a firm’s profitability in terms of profits and losses before taxes as a percentage of shareholders’ equity, indicating the ability of a company to generate profits with the money that shareholders have invested.10 The underperformance of SOEs was widespread in all three countries in 2014, yet most striking in Bulgaria. Excluding the non-market SOEs classified within general government would imply that the remaining SOEs engage in market activities and should hence be able to compete with private firms. Indeed, the ROE ratios for the individual SOEs within general government point to worse-than-average performance within their sectors, most notably the railway passenger service company. However, the sectoral averages are hardly affected due to the small number of general government SOEs, and private firms’ profitability remains way ahead of SOEs. In Croatia, the energy SOEs outperform private firms based on profits in the hydro sector and low-cost energy inputs. The state-owned postal sector, although classified as market companies by the authorities and thus not included in general government, is disadvantaged by its public service obligation as private competitors are free to specialize on the most profitable routes. In contrast to the large negative ROE of 26 percent in Bulgaria, however, postal service SOEs in Croatia and Romania managed to yield positive ROE ratios, even though lagging behind private peers.


Return on equity (ROE), Bulgaria


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.Notes: Based on the average ratio of profits/losses before tax over equity. *SOEs outside general government

Return on equity (ROE), Croatia


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.Notes: Based on the average ratio of profits/losses before tax over equity. *SOEs outside general government

12. Bulgarian SOEs appear to have lower allocative efficiency of capital as measured by the return on capital employed (ROCE), defined as the operating profit or loss before taxes as a share of capital employed.11 This measure indicates the efficiency by which the sum of shareholders’ equity and debt are deployed to generate profits. In Bulgaria, SOEs are less efficient in employing their capital resources than private peer companies in all sectors. While mining is the most profitable and efficient SOE sector, private companies operate even more efficiently with their capital. In the other sectors, the shortfall is even more striking, with postal services again at the end of the scale. When excluding SOEs within general government, the affected sectors display slightly more favorable numbers as the ROCE ratios of all general government SOEs point to worse capital efficiency than their sectoral averages; however, the general picture compared to private firms remains unchanged. While comparable data for Croatia are not available, the situation in Romania is more nuanced; mining, water and energy SOEs display larger ROCE ratios than private companies do, pointing to more efficient capital allocation in SOEs.


Return on equity (ROE), Romania


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.Notes: Based on the average ratio of profits/losses before tax over equity. *SOEs outside general government

Return on capital employed (ROCE), Bulgaria


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.Notes: Based on the average ratio of profits/losses before tax over equity.

Return on capital employed (ROCE), Romania


Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.Notes: Based on the average ratio of profits/losses before tax over equity.

13. Similarly, private firms do better than SOEs in labor resource allocation. This difference appears in higher average cost of labor per capita in SOEs than in private firms in all sectors of the three countries, with the notable exception of the Romanian energy sector.12 Bulgarian non-market SOEs would be expected to display higher costs than SOEs outside general government subject to competitive pressure. Yet, this assumption is not supported unequivocally by the data as labor costs in the SOEs within general government undercut the sectoral average in the mining, transport and water sectors. Compared with private firms, however, the evidence points to lower efficiency and competitiveness in SOEs overall.


Average cost of employee, Bulgaria

(EUR thousand)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.* SOEs outside general government

Average cost of employee, Crotia

(EUR thousand)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.

14. Bulgaria’s and Romania’s network SOEs deliver partly poor infrastructure quality. The World Economic Forum’s Global Competitiveness Indicators assess Bulgaria’s quality of overall infrastructure is relatively weak among Central, Eastern, and Southeastern European (CESEE) countries. While Romania’s performance is broadly similar to Bulgaria’s, Croatia achieves a more favorable result. Bulgaria’s electricity supply quality is particularly poor. The quality of railroads is better in Bulgaria than in Croatia and Romania, but compared to the region, Bulgaria ranges only mid-field. This evidence seems to indicate that there is ample room for Bulgarian and Romanian SOEs to improve their output quality to avoid wider risks to the economy’s competitiveness.


Average cost of employee, Romania

(EUR thousand)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Sources: Orbis; and IMF staff calculations.

Quality of overall infrastructure

(higher denotes better quality)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Note: Composite indicator of energy, transport, and ICT infrastructure.Source: WEF Global Competitiveness Indicators (2015-2016).

Quality of electricity supply

(higher denotes better quality)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Note: Reliability of electricity supply, i.e. lack of interruptions and lack of voltage fluctuations, from 1 = extremely unreliable, to 7 = extremely reliable.Source: WEF GCI (2015-2016).

Quality of railroads

(higher denotes better quality)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Note: Quality of the railroad system, from 1 = extremely underdeveloped, to 7= extensive and efficient.Source: WEF GCI (2015-2016).

15. The performance of SOE-dominated network sectors affects productivity also in other sectors of the economy. Recent World Bank analysis based on Bulgarian firm-level data shows that structural reforms in SOE-dominated network service sectors have significantly positive effects on firm productivity also in manufacturing and other downstream sectors which rely on service inputs (World Bank, 2015). The identified reforms include service-sector liberalization and deregulation as specified in the EBRD Structural Change Indicators, measuring reform progress in transition economies against the standards of advanced economies. The authors also test the impact of the presence of foreign service firms, the level of competition, and the extent to which service providers are also exporters – given that productivity in exporting companies tends to exceed that of non-exporters. Liberalization and deregulation reforms turn out to be particularly strong in the electricity sector, and also likely in the transport sector, although the analysis of the latter suffers from data shortages. Both sectors are heavily dominated by SOEs in Bulgaria. Opening these sectors up to foreign investors, increasing competition and, to a lesser extent, promoting export activity among network sector firms, leads to improved firm-level total factor productivity in downstream firms. In sum, the evidence suggests that improving the performance of SOE-dominated service sectors, notably energy, bears the potential to boost productivity across the economy as a whole.

Challenges in Bulgaria’s Energy and Transport Sectors


The state-owned electricity sector continues to face financial challenges, mainly on account of a tariff deficit at the National Electricity Company (NEK). This deficit arises as the difference between excessive costs on the one hand, given preferential prices for US-owned thermal power plants, green energy producers and co-generators, and artificially reduced retail prices set by the energy regulator on the other, at which NEK sells electricity to electro distribution companies. As a result, NEK’s revenues range below its cost which has led to a negative return on equity since 2012. In 2015, NEK’s debt level decreased slightly on the back of reduced intra-holding loans but it is still subject to substantial risk, due to the recent arbitration court decision about the Belene nuclear power plant. The decision obliges NEK to pay EUR 550 million plus interest to Russia’s Atomstroyexport as a compensation for the equipment already produced. NEK’s financial loss amounted to BGN 196.7 million as of end-2015. Loss write-offs further consumed its equity in 2015. Short-term liabilities to suppliers reached BGN 2.2 billion in 2015. NEK has high leverage, with an increasing debt-to-equity ratio of 213 percent and a debt-to-assets ratio of 68 percent.

Sources: CSD, NEK financial statements 2007-2015; and IMF staff calculations.

First steps have been taken to address the severe governance challenges in Bulgaria’s energy sector. The efficiency and consistency of decision-making processes within the sector have been widely questioned and price liberalization has been called for, as the legislative framework for independence has been seen as inadequate to shield the sector from the influence of vested interests and political interference. The 2015 amendments to the Energy Act introducing tariffs changes and independence of the energy regulator served as steps in the right direction towards restoring financial sustainability and reducing the financial losses and indebtedness of NEK. These amendments have allowed NEK to stop buying electricity at excessive prices from inefficient coal producers (co-generators), having contributed to reducing NEK’s deficit in 2015.

A new Energy System Sustainability Fund has been created in 2015 to reduce NEK’s deficit gradually. The fund collects 5 percent of the revenues without VAT of energy producers with the aim of covering revenue shortfalls due to the tariff deficit. The regulator does not consider this type of cross-financing as state aid, but after the envisaged liberalization of the electricity market, the approval of the European Commission’s competition authority will be required. The fund is expected to raise additional revenues for NEK amounting to BGN 400 million per year.

Excessive electricity wholesale prices are set to be renegotiated. After NEK’s parent holding company BEH secured a bridge loan of EUR 535 million in April 2016 and placed a Eurobond of EUR 550 million in July 2015, the envisaged agreement with the US-owned thermal power plants to bring down high wholesale prices in return for repayment of arrears is expected to be implemented.1


Railway SOEs stand out with weak performance. The railway companies’ underperformance is reflected in fiscal accounts by subsidy transfers amounting to around 0.5 percent of GDP on average since 2009. Losses are now reflected in the government’s budget deficit on an accrual basis, following the reclassification of the Bulgarian State Railways (BDZ) passenger services to the general government sector according to Eurostat-ESA2010 rules. BDZ’s profitability remained negative in through 2015. The debt-to-assets ratio slightly increased from 2014 to 2015, reaching 88 percent.


Budgetary subsidies to the railway sector

(percent of GDP)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Source: Ministry of Finance.
Source: BDZ financial statements, 2012-2015.

In the presence of structural challenges, railway reform progress has been sluggish. Performance and efficiency of the railway sector have been held down by limited own revenue, underachieving management, a large and inefficient network, weak rehabilitation, outdated signaling and safety systems, lack of lines and slots dedicated to freight carriers, poor condition of the vehicles, and lack of large border stations. All these factors make it difficult to compete successfully with other means of transportation. The governance reform started in 2010 had envisaged a restructuring of BDZ and disposal of non-core loss-making business but progress has been limited and the privatization of the freight services company has failed despite the intentions of several governments.

1 The arrears amounted to BGN 950mn in 2015, or BGN 600mn if netted from the US firms’ arrears to state-owned coal producers.

D. SOE Governance

16. Good corporate governance is at the heart of healthy SOEs. Given their special role as providers of key public services, the effectiveness of SOEs has a strong impact on the welfare of citizens and on the competitiveness of the economy at large. As SOEs often operate with dual goals of economic market activity and public policy obligations, a functioning governance environment for SOEs is crucial. Well-designed governance structures are also needed to address the frequent challenge of undue hands-on and politically motivated ownership interference in SOEs.

17. The OECD guidelines on SOE governance provide an international benchmark of best practices. Agreed between OECD member states in 2005 and further developed in 2015, the guidelines are recommendations to governments towards efficient, transparent and accountable operation of SOEs. They aim at professionalizing the state as an owner, making SOEs operate with similar good practices as private enterprises, and ensuring competition between public and private firms at level playing field. Box 3 presents the overall guidelines in brief (OECD, 2015a). Due to their general relevance, these SOE guidelines constitute useful yardsticks also for countries like Bulgaria, Croatia and Romania, which are currently not members of the OECD.

OECD Guidelines on Corporate Governance of SOEs

Rationales for state ownership: The state exercises the ownership of SOEs in the interest of the general public. It should carefully evaluate and disclose the objectives that justify state ownership and subject these to a recurrent review.

The state’s role as an owner: The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.

SOES in the marketplace: Consistent with the rationale for state ownership, the legal and regulatory framework for SOEs should ensure a level playing field and fair competition in the marketplace when SOEs undertake economic activities.

Equitable treatment of shareholders: Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognize the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information.

Stakeholder relations and responsible business: The state ownership policy should fully recognize SOEs’ responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders. It should make clear any expectations the state has in respect of responsible business conduct by SOEs.

Disclosure and transparency: SOEs should observe high standards of transparency and be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies.

The responsibilities of boards: The boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.

18. Qualitative SOE governance indicators point to room for improvement, notably in Bulgaria and Romania. Comparing the OECD’s state control indicators for available CESEE countries shows Bulgaria on top of the list of most restrictive SOE governance environments. This indicator gauges the insulation of SOEs from market discipline and the political interference in the management of SOEs. Romania follows two ranks behind Bulgaria while Croatia scores more favorably.


Governance of SOEs

(higher denotes more restrictive)

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Note: Degree of insulation of SOEs from market discipline and degree of political interference in the management of SOEs. Source: OECD Product Market Regulation Indicators (2013).

19. Bulgaria’s main SOE governance challenges stem from the overall ownership policy, financial oversight, and governance of SOE boards and CEOs. The following sub-sections address these issues in turn, each highlighting first the current challenges in Bulgaria, then outlining OECD guidance and experience in peer countries, before proposing policy recommendations to improve the situation in Bulgaria. The chart summarizes the reform recommendations.


Overview of SOE governance reform recommendations

Citation: IMF Staff Country Reports 2016, 345; 10.5089/9781475552492.002.A001

Clearly Articulated Ownership Policy

20. Bulgaria’s ownership policy is currently not articulated with full clarity, and the SOE governance structure seems fragmented. Even after large-scale privatization during the transition phase, today’s SOE landscape in Bulgaria remains characterized by legacy issues. A clear rationale for state ownership of individual companies and a coherent strategy for exercising the state’s SOE ownership function are largely absent. SOEs report to their respective line ministries or to subnational government bodies, without effective coordination and oversight within the government. There is no explicit SOE framework law to clarify and govern the respective roles of different government bodies in relation to SOEs.

21. OECD guidance recommends to develop an explicit ownership policy. The government should specify, and regularly review, the overall rationales for state ownership and its policy objectives, such as the creation of value, the provision of public services, or strategic goals like keeping certain industries under national ownership. It should also clarify how the state intends to articulate its ownership role, notably by defining the respective roles and responsibilities of government bodies involved. The OECD recommends to exercise SOE ownership rights in a dedicated, accountable entity within the government, ensuring consistency and allowing for concentrating relevant experts on key issues in one place. The ownership policy should ideally be embodied in a specific high-level document which should reference and synthesize the elements of policies, laws, and regulations applicable to SOEs.

22. Some regional peer countries have formulated ownership policy documents. Lithuania adopted an ownership policy in 2012 by issuing Ownership Guidelines. These guidelines outline the rationales and objectives for different categories of SOEs, including those who are expected to maximize profits; fulfil objectives in the national strategic interest; and reach national social or political goals. The document also specifies the rights and responsibilities of state ownership entities for the implementation of SOE governance arrangements (OECD 2015b). In Latvia, the ownership policy is articulated in the State Administration Structure Law, stipulating the rationale for the state to own commercial enterprises in cases of market failure, natural monopoly, strategically important sectors, sectors which require large capital investments, and sectors in which the public interest requires higher quality standards (OECD 2015c).

23. Developing a clear ownership policy would help making Bulgaria’s SOE governance framework more coherent. Bulgaria’s fragmented SOE sector calls for a clear and consistent ownership policy. Such a document should reflect the overall rationale for state ownership, based on the objectives for individual SOEs, and set out a review process to explore whether to maintain or change the ownership status of individual SOEs. It should also specify and motivate the respective roles of the Ministry of Finance, sectoral line ministries, municipalities and other government bodies in executing the state ownership role for SOEs, and duly motivate whether a centralized, decentralized, or hybrid ownership model is best placed for Bulgaria. The government could consider putting forward a designated SOE framework law, or incorporate these elements in the existing Public Finance Act.

Effective Financial Oversight

24. Bulgaria’s performance and evaluation frameworks for SOEs appear not sufficiently systematic. Performance control and monitoring practices for SOEs rest largely with the respective line ministries and varies considerably as internal rules and well-specified performance targets are generally not in place (Park et al., 2016). Areas which are centrally managed, such as the dividend policy, suffer from ad-hoc decision-making, at the detriment of investment and innovation activities within the SOEs. In terms of output evaluation, there are no systematic consumer satisfaction surveys or other evaluation systems of the performance of SOEs in operation which would allow horizontal quality control in line with standardized index measures. Although the Ministry of Finance collects and puts online the quarterly financial statements of individual SOEs, it neither provides SOE data in a comprehensive and consistent format, nor publishes any systematic assessments of fiscal risks or economic implications stemming from SOE performance.

25. The OECD recommends to specify performance objectives, followed up by regular monitoring. Performance objectives typically set out financial and operational targets, including on rates of return, capital appropriateness, and dividend policy, creating a stable planning framework for long-term investment and public service obligations and limiting state interference in operational issues. The fulfillment of performance targets should be closely monitored by internal and external reporting and evaluation systems. Performance benchmarking with private and public sector entities at domestic and international levels can be a powerful tool to ensure appropriate productivity and resource allocation efficiency.

26. Experience in peer countries points to beneficial effects of performance objectives and monitoring. Lithuania’s SOE reform in 2010 put ROE targets and monitoring in place, contributing to the significant progress of SOE reform in Lithuania as attested by the EU (European Commission, 2015). Romania and Slovenia have adopted performance monitoring concepts for SOEs while Croatia is working on improving company-specific objectives (European Commission, 2016). Dividend policies in regional peers vary substantially between ad-hoc pay-outs and more formalized mechanisms (see Box 4). Among OECD countries, Korea applies a particularly informative and rigorous SOE monitoring system, including customer satisfactions surveys and index-based evaluations which are seen as key factors for the exemplary efficiency and performance of Korea’s SOEs (Park et al., 2016). To ensure consistent financial oversight of SOEs across the government, many countries operate dedicated monitoring units. These units are often placed within the Ministry of Finance to make best use of expertise in corporate finance, financial analysis and corporate governance, for instance in Chile and South Africa. They frequently publish annual monitoring reports to shed light on SOEs’ financial performance and emanating fiscal risks (IMF, forthcoming).

Dividend Policies Applied in SOE Sectors of Peer Countries

Dividend policies need to strike a balance between government interests for fiscal revenue and company interests for financial sustainability. While the state as the owner has a legitimate interest in collecting a share of SOE profit, the companies’ needs to retain earnings for achieving a solid capital structure and for making long-term investments to spur innovation and productivity should not be neglected. The OECD guidelines do not recommend a specific dividend policy. A recent OECD member survey highlights the diversity of existing dividend policy approaches (OECD, 2014).

  • No explicit dividend policy. Dividends are negotiated on a case-by-case basis between the SOE boards and the state. Some countries acknowledge that government budget needs influence the ad-hoc decisions on dividend levels, while others point to SOE profitability and future capital needs as relevant factors. In the CESEE region, the Czech Republic, Estonia, and Hungary are included in this group. Although not covered by the OECD survey, Bulgaria, Croatia and Romania seem to fall under this category as well. This approach appears particularly prone to excessive dividend collection.

  • Broad guidelines. The entire SOE sector is subject to a set of broad guidelines determining factors which should be taken into account in setting dividend levels. In Poland, the Treasury’s guidelines for SOEs stipulate that annual dividend decisions should be guided by the need to recover prior losses, long-term investment strategies, privatization procedures, and firm indebtedness. The dividend levels are determined in relation to rate-of-return indicators and liquidity ratios.

  • Explicit dividend ratios. Pre-defined target percentages are applied. In Lithuania, the state expects dividends from limited liability firms of at least 7 percent of equity and at most 80 percent of company profits while statutory corporations are expected to pay out 50 percent of annual profits. Slovenia’s general dividend policy foresees an annual pay-out of at least one third of net profits. Extraordinary dividend pay-outs have also occurred in both countries.

  • Links to optimal capital structure. Dividend payments are explicitly linked to achieving a desired capital structure, reflected by a certain target credit rating. While not applied in CESEE countries, the Netherlands expects all SOEs to maintain an investment grade credit rating. In Australia, company profitability and future capital expenditure needs are the guiding factors for dividend consultations between SOE boards and the government, in view of a targeted BBB credit rating.

Bulgaria’s dividend policy would benefit from a more structured approach. While the link to optimal capital structure might be too demanding for Bulgaria’s SOEs, the establishment of broad guidelines for the setting of annual dividend payments would already reduce the uncertainty related to pay-out decisions. Whether an explicit dividend ratio should be prescribed could be the object of consultations between SOEs and the relevant government bodies.

27. Financial oversight of SOEs in Bulgaria would benefit from a comprehensive monitoring approach and strengthened capacities at the Ministry of Finance. Performance targets for SOEs should be clearly defined and closely monitored. These indicators could include financial performance ratios, such as the profit margin (earnings/revenues), return on equity (earnings/equity) and return on assets (earnings/assets), as well as financial risk indicators, such as liquidity (current assets/current liabilities), leverage (assets/equity), and solvency (liabilities/revenue). The monitoring framework could comprise sanctions with various degrees of severity, including additional reporting requirements and controls or administrative measures imposed on SOE boards (IMF, forthcoming). The Ministry of Finance would benefit from reinforced capacities for monitoring and analyzing the performance of SOEs. To improve the monitoring of fiscal risks at all levels of government, the SOE oversight role of the Ministry of Finance could be further strengthened by ensuring that the Public Finance Act and its fiscal rules cover the monitoring also of municipally-owned SOEs more explicitly. Finally, customer satisfactions surveys and other forms of output quality control could be developed and executed by external, independent consultants, using consistent methodologies across SOEs.

Transparent and Professional SOE Board and CEO Governance

28. SOE board and CEO appointments in Bulgaria lack professional mechanisms. CEOs and boards of fully state-owned companies are typically appointed directly by the responsible line ministry, without compulsory selection procedures and well-defined job descriptions. As a result, CEO recruitment is prone to frequent change and political intervention, leading to management with often inappropriate qualification and experience (Park et al., 2016).

29. OECD guidance calls for efficient and well-functioning professional boards. The nomination process should be structured and based on skill, competence, and experience, and operationalized through competitive selection procedures. Involving professional staffing agencies can help safeguarding private-sector expertise and international experience among potential candidates. Clear remuneration policies can address the trade-off between attracting qualified professionals and ensuring long-term company interests while avoiding excessive remuneration. Endowed with a clear mandate, boards should be enabled to exercise their operational functions independently and without undue state intervention. Boards should have the power to appoint and remove the CEO, potentially in concurrence with the relevant government body exercising the state’s ownership role. CEO compensation should be tied to performance and duly disclosed.

30. Peer countries have been making efforts towards more professional SOE boards. Lithuania’s 2010 SOE governance reform included measured to improve the nomination process and create a database of potential board members. Croatia adopted a new framework for board selection in 2015, aimed at improving qualification requirements and opening up for private-sector candidates. Romania has been making efforts to depoliticize and professionalize SOE boards, using transparent selection procedures and, in case of large companies, contracting the selection process to an independent external advisor (European Commission, 2016). While practical implementation of these measures has partly still some way to go, they point in the right direction.

31. Professionalizing boards would improve efficiency and accountability in Bulgaria’s SOEs. As competitive selection procedures for board nominations are not mandatory and in practice rather uncommon in Bulgaria, adhering to OECD guidance and best practice in other countries would imply a clear improvement for Bulgarian SOEs. Moving CEO appointments from line ministers to SOE boards, possibly in cooperation with the government body endowed with the state ownership function, would reduce the potential for political interference and improve operational efficiency. Formulating a clear and merit-based remuneration policy across SOEs and monitoring CEO performance would further improve transparency and accountability.


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Prepared by Uwe Böwer and Iana Paliova.


Bulgaria, Croatia and Romania form the subset of Southeast European countries which are members of the European Union (SEE-EU countries) in IMF surveillance, among the emerging economies of Central, Eastern and Southeastern Europe (CESEE).


For simplicity, the remainder of this note will refer to “SOEs” as state- and municipality-owned enterprises.


Sectors are defined in line with NACE-2 sections as follows: Mining (B – mining & quarrying), other industries & agriculture (A – agriculture, C – manufacturing, F – construction), energy (D – electricity, gas, steam and air conditioning supply), water utilities (E – water supply, sewerage, waste management and remediation activities), transport (H49-H52 - land, water and air transport and warehousing/support activities for transportation), postal services (H53 – postal and courier services), healthcare (Q – human health and social work activities), other services (G – wholesale and retail trade, I – accommodation, J – ICT services, K – financial services, L – real estate services, M – professional activities, N – administrative and support services, P – education, R – arts & entertainment, S – other service activities).


Employment data are available for 766 SOEs in Bulgaria, 167 SOEs in Croatia, and 676 SOEs in Romania. Turnover data are available for 782 SOEs in Bulgaria, 176 SOEs in Croatia, and 679 SOEs in Romania. Value-added data are available for 689 SOEs in Bulgaria, 169 SOEs in Croatia, and 526 SOEs in Romania.


Since the healthcare reform of 2000, Bulgaria’s hospitals are set up trade companies.


In Bulgaria, hospitals and medical centers, which are funded by the Ministry of Health or the National Health Insurance Fund, can be considered part of general government, affecting all 416 state-owned entities in the healthcare sector of the Orbis dataset. Furthermore, the Bulgarian authorities explicitly classified 17 SOEs other than healthcare as part of the general government sector in 2014, out of which 9 are covered by the Orbis dataset – 4 firms operating in the transport sector, 2 in the service sector, 1 in mining, energy and water utilities, respectively. For Croatia and Romania, the distinction between SOEs within and outside the general government sector is not included in this paper.


Data on profits and losses before tax are available for 782 SOEs in Bulgaria, of which 357 are classified outside general government, for 176 SOEs in Croatia, and for 679 SOEs in Romania.


Data on liabilities are available for 782 SOEs in Bulgaria, out of which 357 are classified outside general government, for 176 SOEs in Croatia, and for 679 SOEs in Romania.


ROE data are available for 637 SOEs (out of which 296 are classified outside general government) and 130,865 private firms in Bulgaria, for 147 SOEs and 21,582 private firms in Croatia, and 427 SOEs and 116,437 private firms in Romania.


ROCE data are available for 470 SOEs (out of which 224 are classified outside general government) and 57,099 private firms in Bulgaria, and for 144 SOEs and 46,906 private firms in Romania. For Croatia, there are no ROCE data available for SOEs.


Data for cost of employees are available for 756 SOEs (out of which 345 are classified outside of general government) and 113,324 private firms in Bulgaria, for 168 SOEs and 26,233 private firms in Croatia, and 635 SOEs and 193,085 private firms in Romania.

Bulgaria: Selected Issues Paper
Author: International Monetary Fund. European Dept.