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€41million loan for Bulgarian power sector
Power-sector restructuring is one priority in EBRD's new strategy for country
The European Bank for Reconstruction and Development is providing a €41.1 million loan to help upgrade and expand the country's power transmission system, as part of the restructuring of the Bulgarian power sector. The investment comes at a crucial time for Bulgaria, which has split its power sector into three parts: generation and distribution - both expected to be privatised - and transmission, which is to remain under the state-owned National Electricity Company (NEK). The European Investment Bank is expected to provide an additional €60 million loan for the project later this year.
The loan is one of the EBRD's largest yet in Bulgaria. The power sector is presented as a priority by the EBRD in its new Bulgarian country strategy, published on its website today at www.ebrd.com. The Bank said it is willing to play a significant role in the financing of independent power generation, as well as exploring ways to help the Bulgarian Government privatise the electricity distribution sector.
The NEK project aims to strengthen Bulgaria's electricity transmission network, regional load dispatch centres and communication system, and to provide institutional support for the establishment of a national transmission and dispatch company. This work, in compliance with national and EU standards, should help reduce both emissions and transmission losses. The project will also help Bulgaria prepare for the integration of regional power grids, opening the power sector to cross-border competition.
Upgrading infrastructure is one of three priorities in the EBRD's strategy for Bulgaria, along with investing in the private sector - especially small and medium-sized enterprises (SMEs) - and strengthening the financial and banking sectors. These areas are key to boosting economic growth and providing jobs. The EBRD has a pipeline of potential projects worth over €500 million. But the speed and size of investments will depend largely on the investment climate in Bulgaria, which continues to daunt some investors.
Infrastructure requires substantial investment, particularly as Bulgaria strives to meet conditions for accession to the European Union. Investment in Bulgaria as a share of GDP is estimated at 18 per cent, compared with 30 per cent in some other countries in central and eastern Europe. In addition to the energy sector, the EBRD paper places particular priority on municipal finance and the environment. Where possible, the EBRD will invest without sovereign guarantees. Last year, it provided the City of Sofia with the Bulgaria's first non-sovereign public-sector loan to construct a water treatment plant. A similar loan to improve public transport in Sofia is planned.
Foreign direct investment, an important source of long-term finance, is strong relative to neighbouring countries, but compares poorly with the average for central and eastern Europe and the Baltic States. FDI will be boosted by the privatisation of the power sector as well as the expected privatisation, this year, of the Bulgarian Telecommunications Company, the incumbent fixed line operator, to which the EBRD has offered its support. And last year the Bank provided its largest corporate investment to pharmaceutical maker Balkanpharma, which had been privatised to an Icelandic strategic investor. But in general, with large-scale privatisation almost complete, Bulgaria will need to find new ways to encourage FDI, including greenfield investment.
The EBRD intends to assume a key role in developing the private sector and encouraging FDI in parallel with the government's efforts to improve the investment climate. The strategy notes that an unclear interpretation of existing laws and a weak judiciary system are among the obstacles that continue to face investors in Bulgaria. The newly elected government is encouraged to capitalise on the relative economic and political stability to continue pushing ahead with reform.
Improvements to the investment climate will complement the EBRD's ongoing efforts to support SMEs, an important source of jobs in Bulgaria. There has been substantial progress in the banking sector but lending to SMEs, particularly very small businesses, is weak. Last year, the EBRD extended a second credit line to Union Bank to support SMEs and supported the creation of a bank specialised in financing micro businesses. Going forward, the EBRD will put increasing emphasis on the insurance and pension sectors, as well as leasing, consumer and mortgage finance.
The EBRD has been operating in Bulgaria since 1992 and has committed €539 million towards 42 projects. In 2001, the EBRD committed €63 million towards 12 projects.
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