In the Wake of Telecoms

Economic News

22 Jul 2010
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While the deputy prime minister and senior members of the Bulgarian Investment Agency are touring Scandinavia this week to promote the country's IT and communications industry, back in Sofia many are awaiting a final decision on Bulgaria's third GSM license - most likely to be awarded at the end of this month to the newly privatised Bulgarian Telecoms Company (BTC).

Deputy Prime Minister Nikolay Vassilev and Pavel Ezekiev of the Bulgarian Investment Agency have so far held a number of meetings, one of the most significant meetings was with the Swedish telecommunications giant Ericsson. The aim is to attract to Bulgaria IT development activities for mobile phone applications, as Sasha Bezuhavova, general manager of Hewlett-Packard Bulgaria, confirmed in an interview with the OBG on September 9, "Telecoms are now the biggest consumers of IT products and innovative services."

A conference has been scheduled for Sofia in October, when a decision will be made on whether to set up local mobile software development facilities.

Meanwhile, signs are emerging that foreign interest in the Bulgarian IT industry is growing.

News source Pari Daily reported this week that a Norwegian company, Ipzone, has plans to invest $60m in Bulgaria to develop telecommunications infrastructure and wireless internet services.

Analysts have long predicted that recent liberalization of the telecoms sector - and most notably the privatisation of BTC - will unleash fresh demand for IT services. Strong growth, especially in mobile voice services (where expansion is widely expected to reach 20% this year), is therefore forecast to pull along some segments of the IT market.

Growing domestic demand for IT services is good news for companies looking to diversify their customer base. A large proportion of software development companies have positioned themselves as cost-effective outsourcing centres. One of the top IT companies, Datecs, generated 85% of its revenue from abroad in 2003.

Although global IT demand is picking up following a few years of slump, there are still good reasons to diversify. Bulgaria's IT sector faces increasing competition both regionally and globally. Luring new customers away from countries such as India is getting increasingly more difficult, because there are problems with the scalability of IT projects and fewer fiscal advantages. While Bangalore has long been established as the tax haven for foreign IT companies, the approach of EU membership is limiting the government's room for manoeuvre when offering foreign investors fiscal incentives, due to strict competition and state aid requirements.

For example, while in the past the government was able to develop tax incentives, such as a 50% annual depreciation rate for computers, software and software licenses, it is now hard pushed to make new concessions which would be in line with EU accession requirements.

Meanwhile, Maya Koteva, who is responsible for economic issues at the EU Delegation in Bulgaria, told the OBG recently that it took over a year to get approval for a new investment promotion law. Under this, investors receive certificates and government support based on the size of their investment.

Those in the top bracket, whose investment exceeds 100m levs (51.1m euros), have been promised infrastructure support, while investors in the lower two categories can expect legal and administrative support. The law has already helped the IT industry to attract Irish and Portuguese companies, with plans recently announced for developing high-tech parks for them in Varna. Their projects will be funded according to the law on investment promotion.

The main asset of the Bulgarian IT industry remains its highly educated specialists and long established IT traditions. Yet neighbouring Romania is snapping at Bulgaria's heels in trying to establish the same credentials on the global IT market. According to Bezuhnova, Romania joined this race much more recently and to its credit has done a decent job in promoting itself as an IT country. However, "Whether, the fundamentals are there", she added, "remains to be seen".

While the race for position in the world market continues, growing local demand will continue to be of interest to both Bulgarian and foreign companies. The market is still maturing, rising from a low base, with the greater part of IT revenues generated through hardware sales. According to recent figures, last year some 151m euros, or 48% of the total IT market, was contained within the computer hardware segment.

As IT penetration increases, reaching smaller and medium enterprises, analysts hope the weight will shift in favour of software developers and system integrators. In the meantime, all eyes are on the best clients in banking, financial services, industries and manufacturing - all of which are set to grow this year, prompting higher IT expenditure.

Finally, of course, a fresh boost is expected from the much-awaited third GSM provider to be announced at the end of this month. According to media reports, Bulgaria's Competition Protection Commission (CPC) extended the deadline within which it should announce its stance until the end of September 2004. The issues are still whether awarding the licence to BTC without a tender can be considered as state aid and whether or not the price of 27.6m euros BTC paid last time is appropriate.

Although these considerations have delayed the arrival of a third GSM provider, the prediction is that telecoms will remain the biggest consumers of IT services for many months to come.

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