Bulgaria Food Industry Privatization

Phase I Report

Prepared for the U.S. Agency for International Development under contract number EUR-0014-I-O0-1056-00

Jean Gilson Doyle Peterson Robert Rodriguez

February 1993

D 0 dAi

7250 Woodmont Avenue, Suite 200, Bethesda, Maryland 20814

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TABLE OF CONTENTS

EXECUTIVE SUMMARY v

CHAPTER ONE BACKGROUND TO PRIVATIZATION 1

BULGARIA FOOD PRIVATIZATION PROJECT 1 COUNTRY OVERVIEW 3

Political and Economic Situation 4 The Future 5

CHAFFER TWO THE PROCESSED FRUIT AND VEGETABLE INDUSTRY 9

VIABILITY OF BULGARIA AS A POTENTIAL SITE FOR INVESTMENT 10 OBSERVATIONS ON THE INDUSTRY 11 THE FUTURE FOR PROCESSED PRODUCTS 12

CHAPTER THREE LEGAL, REGULATORY, AND INSTITUTIONAL FRAMEWORK 15

THE LEGAL AND INSTITUTIONAL FRAMEWORK OF PRIVATIZATION 15 Identifying a Seller 15 An Institutional Vehicle for Privatization 16

CHAFTER FOUR PRIVATIZING SELVIKONSERV AND PLEVEN 19

CANDIDATE SELECTION METHODOLOGY 19 THE SELLER 23

The Ministry of Industry 23 The Privatization Agency 23

THE BUYERS 24 PRIVATIZATION STRATEGY 25

Selvikonserv 25 Storco Pleven 26

CHAPTER FIVE 33PHASE U WORK PLAN

37ANNEX: ENTERPRISE PROFILES

39Storco Pleven Enterprise Profile Letter of commitment from the Privatization Agency to include Pleven in the privatization

54program 55Selvikonserv Enterprise Profile

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LIST OF TABLES

Table 1 U.S. Government and Private Sector Initiatives 2

Table 2 Economic Structure of Bulgaria 5

Table 3 Summary of Agricultural Policy Reform in Bulgaria 6

Table 4 Production Decline in Fruits and Vegetables (1988-1992) 9

Table 5 Initial Evaluation of Eleven Enterprises 20

Table 6 Selection Criteria Ranking of Food Processing Enterprises 22

Table 7 Methods of Privatization - Summary 30

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EXECUTIVE SUMMARY

As mandated by the U.S. Agency for international Development under the Eastern European Enterprise Restructuring and Privatization (EEERP) indefinite quantity contract, Development Alternatives, Inc. (DAD as a subcontractor to Deloitte & Touche has successfully completed all tasks and analysis included in Phase I of the project and presents its general findings and recommendations for the project's second phase. In accordance with the project's objectives, DAI is working with its counterp-s in the Government of Bulgaria (GOB) to promote economic growth and sustainable eil ployment internally through the privatization of selected enterprises in the processed fruit and vegetable subsector. Based on the work completed to date and on extensive discussions with representatives from the Ministry of Industry and the Privatization Agency of the GOB as well as with A.I.D. Bulgaria officers, DAI recommends the following two actions:

• Privatize the state-owned enterprise Selvikonserv as a whole, in its present form; and

• Privatize the state-owned enterprise Storco Pleven in such a way that the firm can be divided into separate clusters. These clusters should be based on investor interest as well as on the combination of operations that offers operational synergies. The process should be flexible enough to allow the clusters to chinge as needed.

In both cases, the DAI team recommends that no restriction on labor reduction be set. Instead, the government should earmark part of the proceeds from the sale to offer adequate severance packages to excess labor or to implement a job retraining and placement program.

PRIVATIZATION IN THE BULGARIAN ECONOMIC AND POLITICAL CONTEXT

To accomplish successfully its stated goal to create a free market economy, the GOB will need to transfer ownership of many of its state-owned enterprises into private hands. Completed privatizations will help allay the current level of uncertainty within the investment community regarding Bulgaria's commitment to free market principles.

Because of past investment in agribusiness and food processing industries, the processed fruit and vegetable subsector represents a good arena in which to use privatization as a tool for economic growth. To survive, this subsector will have to consolidate and enhance its productivity and efficiency. Both Selvikonserv and Storco Pleven offer investment opportunities that the DAI team feels have a potential to attract foreign investors. The privatization of these enterprises will result in viable companies if done in a way that allows new owners the freedom to make decisions about labor or about other questions, which, in turn, allows the owners to make an adequate return. Furthermore, by offering the workers who are laid off due to privatization attractive severance packages or job retraining and placement, the government will not only ensure a humane privatization that minimizes social costs, but also garner the political support necessary for sustained privatization efforts by any government in transition.

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However, it is important to note that, in their current state, both of these enterprises are illiquid and insolvent. They have massive debts and surplus labor. In the case of Storco Pleven, low productivity and efficiency ratios are caused by production lines that offer no synergies or economies of scale. Both of these enterprises also have claims on the land in which they are located. However, the DAI team has concluded that these problems are solvable with proper attention from the GOB.

The privatization of Selvikonserv and Storco Pleven can alleviate the government's budgetary pressures while sending a clear and strong signal to both the international investment community and the people of Bulgaria that the government is committed to improving its economy through transfer of ownership that takes into account the needs of investors as well as those of Bulgarian workers and taxpayers.

SELVIKONSERV

Selvikonserv isa relatively small, highly specialized enterprise that makes fruit jam and processed canned vegetables. It is located in Sevlievo, north of Sofia, Bulgaria. The enterprise's most promising investment opportunity is its state-of-the art Terlet-built jam and confiture line that can potentially serve the growing premium jam and yogurt fruit markets in Europe and the Middle East. Selvikonserv currently employees 175 workers; the DAI team estimates that 50 percent of this work force are redundant. One claim has been submitted for part of the land on which Selvikonserv is located. The claim is unclear in defining boundaries so the actual amount of land being claimed has not been determined.

STORCO PLEVEN

Storco Pleven presents a unique opportunity for growing food companies to expand their access to European markets. The enterprise's highly diversified capabilities present a variety of excellent investment opportunities. Storco Pleven's capacity includes a three-stage fruit and vegetable concentrator strategically set up to produce ketchup, high value-added fruit filling for pastries, and concentrated nectar for fruit drinks for export to European Community and Middle East markets. The enterprise offers further opportunity to diversify cash flow through the operation of a state-of-the-art, welded-seam, fully automated Itakian Cevolani metal can fabrication line that already has an established market share in Bulgaria in addition to supplying the enterprise's pea, tomato, and mixed vegetable lines. Storco Pleven also offers potential in the food ingredient mrket with an automated Walter Rau frozen fruit and vegetable processing line with automated fillers and a three-ton/hour Frigoscandia individual quantity freezing (IQF) tunnel.

At present, Storco Pleven is underperforming and is unable to service a massive short-term and long-term debt. Currently, Storco Pleven has more than 1,000 employees on its payroll of whom 65 percent are estimated to be redundant. There are four claims on the land upon which Storco Pleven is located. The "new" site, however, already houses more than 50 percent of the enterprises' operations and has more room for additional operating lines. Therefore, the DAI team has concluded that this issue is solvable.

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THE PHASE I REPORT

Chapter One of this report introduces the reader to Bulgaria and the Bulgaria Food Privatization Project. Chapters Two and Three describe the Bulgarian processed firit and vegetable subsector and the legal, regulatory, and institutional privatization framework in Buigaria. Chapter Four integrates the information and analyses of previous chapters mid states the methodology for selection as well as DAI's recommended privatization strategy for each selected enterprise. In Chapter Five, we outline the tasks and analyses to be completed in Phase II of the project.

CHAPFER ONE

BACKGROUND TO PRIVATIZATION

Bulgaria's economy, like many of its Eastern European neighbors, is in the midst of an historic transformation from plan to market. Stimulating the growth of a vibrant and productive private sector - through both privatization of existing public enterprises and the growth of new private companies ­is one of the most important challenges Bulgaria faces in this transformation. Privatization, of course, is not an end in itself and is certainly not the only answer for the difficulties faced by Bulgaria. A variety of efforts must be made to improve the organizational structure and enhance the performance of state­owned enterprises in Bulgaria, and privatization represents only one of these efforts.

Privatization seeks the benefits that can be derived from the efficiency and quality gains generated by the competitive forces and incentive structure that characterize the private sector. However, for privatization to be a true solution to the budget squeeze, governments must not only demonstrate that it offers cost savings but that these savings are realizable. Furthermore, these savings must be achieved in a manner that honors existing bargaining agreements and that considers the costs that a privatization process represents to displaced public sector workers.

However, the combination of a sagging Bulgarian economy due to the overnight collapse of the former Soviet Union (FSU) market and a sharp weakening of domestic demand is causing unsustainable budgetary pressures on the Bulgarian Treasury. In response to this challenge, the Bulgarian government has launched a variety of efforts to improve the system's overall efficiency. These efforts are designed to increase productivity and cut costs wherever possible. One specific effort has focused on the merits and consequences of privatizing the Bulgarian food sector. The Ministry of Industry (MOI) believes that the program for privatization and reorientation to free markets of a key subsector such as food processing is of critical importance for securing rapid and visible success in other priority sectors such as tourism and agriculture. Together, these sectors are expected to become the locomotives for new economic growth through ihe industries' ability to attract significant direct foreign investment, create new jobs, and generate important export income. Current initiatives in foreign assistance are sketched in Table 1below.

BULGARIA FOOD PRIVATIZATION PROJECT

Development Alternatives, Inc. as a subcontractor to Deloitte & Touche has been authorized by the U.S. Agency for International Development to execute Delivery Order No. 21, the Bulgaria Food Industry Privatization Project under the Eastern European Enterprise Restructuring and Privatization (EEERP) indefinite quantity contract (IQC).

The Bulgaria Food Industry Privatization Project seeks to capitalize on Bulgaria's past investment in agribusiness and food processing to generate economic growth and employment internally. The first steps in this process can be accomplished through introducing the efficiency of private ownership of state­owned enterprises on a sustainable basis. This project will culminate in the privatization readiness of two state-owned enterprises in the processed food subsector: Storco Pleven and Selvikonserv. We expect the privatization readiness process of these enterprises to also serve as prototypes that will guide future privatization efforts by the Government of Bulgaria.

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Table 1 U.S. GOVERNMENT AND PRIVATE SECTOR INITIATIVES

Country Bilateral Enterprise Funds

The Overseas Private Investment Corporation (OPIC)

The United States Export-Import Bank

Trade and Development Program

Other U.S. Government Agencies and Organizations

Bulgaria Yes, with agribusiness focus

Active Active; Short, medium-term financing

Eligible; No current agriculturalprojects

1.USDA assistance 2. USDA exportcredit guarantees3.Commerce trade mission food processing and packaging October 19924

The DAI team plans to complete this project in two phases. During Phase I, the team conducted two diagnostic missions in November and December 1992. While on these missions, the DAI team completed the following tasks:

" Identified appropriate counterparts within the Bulgarian government;

* Assessed Bulgaria's privatization process;

* Identified and selected the best candidates for privatization;

* Developed detailed profiles of the selected privatization candidates; and

* Identified, contacted, and nurtured potential foreign investors.

of the Bulgaria Food Industry project, the DAI team will concentrate onDuring Phase I implementation of the commercialization and pilot privatization readiness of the companies, or segments of companies, that were selected in Phase I. The main objective of Phase II is to prepare these two enterprises for an eventual transfer of ownership. Chapter Five of this report outlines in detail Phase II of this project.

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COUNTRY OVERVIEW

Bulgaria is an urbanized nation of 9 million people. At one time Bulgaria was one of Eastern Europe's most highly centralized economies with extremely strong ties to the former Soviet Union. In addition Bulgaria served as a conduit between the former Soviet Union and the Western countries with which Bulgaria maintained relations.

Bulgaria is rich in natural resources. From an agricultural standpoint Bulgaria has a wide range of microclimatic zones allowing production of vegetables and fruit products throughout the country. Bulgaria is also blessed with a favorable and mild climate for these and other field crops. The main production areas have an abundance of fertile and well-adapted soils for agriculture.

Beginning February 1, 1991, retail prices on virtually all nonessential items were liberalized. (Most essential food items remain under some type of government price control.) Other structural reform measures introduced included a tax overhaul, demonopolization, and privatization plans. A continuing policy problem in the reform process is the government's attempt to shift the burden of the state enterprises' large debt onto the tax payer and the state budget because of scarce financial resources. Inefficient state enterprises continue running up new debts because of continuing production declines and the resultant increase in costs of production.

The state foreign trade monopoly was abandoned in 1989. Trading entities can gain access to their hard currency and may retain export earnings. The 1991 tariff averaged 8 percent for farm products. A 15 percent surcharge has been imposed on most imported goods to improve balance of payments. Hard currency shortages and currency inconvertibility remain formidable barriers to trade. Countertrade is practiced with the CIS. Bulgaria imported a considerable amount of corn from the United States in 1991 ($33 million). Export opportunities exist for U.S. grains oilseeds, livestock genetics, cotton, and farm inputs. U.S. expertise in financing, farm management, and food processing is needed. The fine-flower industry is considering establishing joint ventures. The Union Investment Fund (BIFP established in February 1992 reports that 75 percent of the projects submitted are in the food industry. Agricultural Exports for 1990 - $1.6 billion (fruit, vegetables, wines, tobacco, cigarettes, eggs, sheep, and live animals). Germany was the largest export trading partner. Agricultural Imports for 1990 - $900 million (corn, sugar, oilseeds, cotton, tropical products).

In January 1991 Bulgaria became eligible for U.S. Department of Agriculture export credit guarantees. In April 1991 Bulgaria was given most favored nation status. In addition to MFN status on tariffs the agreement improves the capacity of American businesses to operate in Bulgaria. A bilateral investment treaty between Bulgaria and the United States provides basic guarantees to U.S. investment. New tax legislation in 1992 provides tax incentives for foreign investment. Bulgaria maintains intercountry currency convertibility at a floating exchange rate.

Although unlikely to provide much economic benefit in the short run, Bulgaria has signed a new bilateral trade agreement with the Russian Federation. Bulgaria is also a member of the Black Sea Trade Group formed in June 1992 consisting of Russia, Ukraine, Georgia, Moldavia, Armenia, Albania, Azerbaijan, Greece, Romania, and Turkey. The trade group may have some positive trade benefits through Turkey or Greece in the short run but, like the bilateral trade agreement, it will likely take several years before the benefits become measurable.

Bulgaria has a r.-latively complete commercial and investment code including privatization regulations. The "Economic Activities of Foreign Persons and Protection of Foreign Investment Act"

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opens the country to foreign investment, provides the rules and rights for foreign investors, and provides

assurances against government expropriation. This act along with the Overseas Private Investment

Corporation (OPIC) insurance provides a sound basis for foreign investment. The commercial code on

the other hand is still being completed; the code for corporations and relations between business entities

are complete, but the definition and regulation of financial transactions and obligations are still

incomplete.

Bulgaria has been relatively successful in controlling inflation. By the end of 1992 the surge

caused by retail price liberalization had largely become a thing of the past; however, inflation continues to be a concern. The government has maintained tight monetary and wage policies to control inflation

and the result ispositive for the general population since goods are available in the market and accessible to most workers. However, consumption patterns have changed from high priced meats to some grain products. Specifically for agribusiness, some retail food prices have been liberalized while others, meat, flour, bread, oil, sugar, milk, and butter, are still monitored. In a similar vein producer prices for some products have been controlled, resulting in a severe cost-price squeeze for producers of many agricultural products. These changes combined with the continued reliance on state-owned entities for processing and export have led to slow development of new markets and thus have not stimulated production. This has significant implications for the fruit and vegetable processing subsector since it is important that they be able to pay prices that will entice growers to invest in new production (for instance, trees) and encourage them to produce vegetables that have a higher cost of production than cereals and other field crops. Tables 2 and 3 on the economic structure of Bulgaria and on agricultural policy reform follow.

Political and Economic Situation

The present political uncertainty will have an impact on this subsector domestically as well as on the interest of potential partners in potential divestiture or indirect privatization. The team observed some of the effects when the government fell in November. For several weeks our government counterparts were unsure of how to proceed because of the possible appointment of new ministers. Some of our early triage work had to be postponed into December because of this uncertainty. The lack of a majority party and the potential for constanly shifting coalitions in parliament suggest that this will be a common

Since several factions inparliament do not want to see privatizationoccurrence over the next few years. continue at its present pace the level ofuncertainty will continue through the next parliamentary elections.

The uncertainty in government and the ability of some factions to enforce a go-slow approach to privatization has resulted in severe economic consequences. Some of these have been outlined above: for example, confused land privatization programs over several years, shifting support to enterprise privatization, and confused response to the loss of the former Soviet Union market.

The concern of the external financial community is manifest in the continuing oversight by the International Monetary Fund of its economic stabilization requirements for Bulgaria. The IMF has made a complete and comprehensive privatization program a condition for long-range assistance. With over $15 billion in foreign debt, the country cannot continue to function without outside monetary assistance and a significant reduction in operating costs of industry through indirect and direct privatization.

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Table 2 ECONOMIC STRUCTURE OF BULGARIA

1987 1988 1989 1990 1991'

GDP (US$ 000,000) 28,101 22,961 21,690 19,905 11,445

GDP growth (%) 15.9 -18.3 -5.5 -8.3 -42.5

Retail trade prices (%) 0.1 0.5 9.0 70.0 334.0

Hard currency (US$ bn)

Exports 3.3 3.5 3.1 2.5 3.40

Imports 4.2 4.5 4.3 3.3 2.80

-0.8 0.8 -1.3 -1.2 -Current account

Gross external debt (Dec) 6.2 8.2 10.2 11.0 12.3

Population (inn, end year) 8.97 8.99 8.99 8.95 8.60 b

Official rate (ave) Lv/US$ 0.863 0.830 0.828 2.313 8.0

'Estimates. bIncludes hard currency trade with former CMEA. 0Official data. For technical reasons the exodus of ethnic Turks form Bulgaria in 1989 was not fully reflected in the population data.

Sources: The World Bank, report dated July 9, 1991; The Economist Intelligence Unit, Country Report No. 1, 1992; and The International Monetary Fund, report dated March 19, 1992.

The Future

While Bulgaria is considered to be lagging behind many of the other countries in passing and implementing reforms, the true test will be whether they learned from the mistakes of others and keep the momentum built for implementation.

Although slow getting started on reforms progress is being widely recognized. Bulgaria has been successfully complying with the International Monetary Fund (IMF) stabilization requirements. In addition the Overseas Private Investment Corporation (OPIC) has agreed to provide political risk insurance and loan guarantees for equity and debt investment- to private businesses.

The thousands of small private businesses that have recently opened in Bulgaria are a result of the broad structural reforms recently implemented by the government. These include reducing the state role in the markets, redefining the state role in businesses that have private competitors, and development of a well planned and organized privatization focus with the Privatization Agency and each of the individual Ministries actively involved in privatization.

Table 3 SUMMARY OF AGRICULTURAL POLICY REFORM IN BULGARIA

REFORM Bulgaria MEASURE

Land Reform Law passed February 1991 to return parcels of land to and original owners. Sept. 1991, only 10 percent of land Restitution previously owned or held in title claimed. Government

may be forced to maintain state and cooperative farms. March 1991 law limits private ownership to 20 hectares and requires land be farmed.

Privatization Very little progress; state owns 93 percent of the of State- wealth; government senselessly shifting burden of state owned enterprises' large tax debt onto tax payer and state Enterprises budget.

Currency Internal currency convertibility; floating exchange rate. Convertibility

External Debt Since March 1990, moratorium on principal and interest debt payments; recently agreed to service official debt extended since Jan. 1, 1991.

Domestic Severe recession; high inflation; large current account Economy deficit; suffering from increased cost of raw materials,

revenue losses from lower sales of manufactured goods; energy crunch due to reduced Soviet deliveries oil, gas.

Economic Feb. 1991, retail prices non-essential items liberalized, Reform tax overhaul, demonopolization and privatization.

Remaining Issues

9 Absence of legal title e Remaining 50 percent of land unclaimed e Establishin'c.n of legal boundaries e Small plots make operation inefficient 9 Limits on land ownership and sale

9 Consistent procedure for valuation e How to handle the excessive debt of most enterprises 9 High percentage of businesses remain state owned (over

90 percent) 9 Potential for debt forgiveness to aid privatization

9 Price controls on some retail and producer prices o Levels of foreign debt

* IMF and WB requirements related to privatization program 9 Negotiation of debt with creditors

* Price controls on retail food and producer prices * High levels of business bad debt * High interest rates * Wage rates versus increasing cost of living

* Tariffs remain high * Licensing required for many imports and exports 9 Legal system needs reform and experience in commercial

law * Need uniform credit code and banking system reform * Standardized accounting and resolution of debt e Systems to move funds internally and linkage to foreign

system

REFORM MEASURE

Foreign Investment Incentives and Regulations

Key U.S. Agribusiness Investment Opportunities

Bulgaria

1991 tariff schedule averaged 8 percent for farm products, and 1/2 percent customs clearance fee for imports and exports; Feb. 1991, 15 percent surcharge on most imported goods; hard currency shortages barrier to imports; Nov. 1991, 3-year trade relations agreement with U.S. signed; Foreign investors may not own land or natural resources.

Financing, farm management, and food processing (especially fruit and vegetable), fine flower industry.

Remaining Issues

* Foreign ownership of land via participation of Bulgarian firm

e Valuation of Investments on a cash basis * Cross registration in both countries required to receive

benefits a 'Economic activities' are treated different than

'investment' * 'Demonopolized' firms are still state owned

e Debt reduction for state enterprises to be privatized e Upgrading standards and quality of product * Overcapacity throughout the subsector * Many businesses have to be partitioned to make sense

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CEAITER TWO

THE PROCESED FRUIT AND VEGETABLE INDUSTRY

There is substantial overcapacity in the fruit and vegetable processing subsector. Currently this subsector operates at approximately 25 percent of its 450,000+ tons annual capacity. The extent of production decline in this subsector between 1989 and 1992 is presented in Table 4.

Table 4 PRODUCTION DECUNE INFRUITS AND VEGETABLES (1988-1992)

(Production Volume - Tons [0001)

........ .. . . ......

1988 .-1989 . . ..

.1990 •.

11 . . . .. .; . . - . . . . .-. . . . . . .

1992: .

. .. ., . .. .. .. . . ... . .:: .. -. ================================================================.=...==.=....=

S~Fruit____,,_

Canned Fruit 255 290 211 63 33

Compote. 71 93 66 14 16

Confiture 32 29 12 8 5 and Jellies :__

Marmalade 5 7 6 4 3

Total 363 419 295 89 57

Sterilized M- 241 206 158 110 41 (in.cans and

Tcrnato 37 60 50 21 19

Total 278 266 208 131 60

Grand Total'% 641 685 503 220 117 Source: Bulgaria Mir:.stry of Industry, Figures are roun-ed

Processing and packing plants for agricultural produce are common throughout Bulgaria. There 2re fruit and vegetable processing facilities in virtually every part of the country. Many of these plants are old, have had little repair and maintenance, and do not represent viable assets. On the other hand, some plants have modem, well-maintained production lines.

Irrigation is used in some areas, but the water resources have not been well develop_! because of the relatively stable climate. Transportation is an asset for Bulgaria with well-developed land and water access to Western Europe, the Middle East, the former Soviet Union, and other potential markets accessible through the Danube or Black Sea.

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Bulgaria's other assets include a relatively well-educated population and work fbrce, the existing to the other East Europeanindustrial asset base, and a relatively high standard of living compared

countries and former Soviet Republics.

The legal and business structure has changed dramatically since 1991. In addition to opening the

country up to trade and investment, the shift to the free market is easily observed throughout the country.

Some of these changes include the rapid increase in private stores, kiosks, and restaurants. It is now

possible to form a private company in Bulgaria and majority ownership can be held by a foreign owner.

A concrete example of the problems facing the agribusiness sector is the uncertainty about

supplies of raw materials to the food processing plants. Many of the managers contacted during our

survey were pessimistic about the long-term health of the industry because they didn't have the money no way of getting financing.to provide inputs to vegetable and fruit growers and the growers had

In an even more critical situation, many of theConsequently premium seed stocks were not being used. farmers were pulling out trees because the short-run return to grain crops was better. It is clear that the

long-time horizon necessary for planting new, permanent crops is going to be difficult for farmers to

grasp as they worry about short-run b-nefits. Finally, the prices that have been paid to farmers, and on

which the processing companies base their costs and pricing, have been remarkably low for high value This will change as the successful r :.ocessors are crops when compared to the other crops being grown.

able to increase their prices.

VIABILITY OF BULGARIA AS A POTENTIAL SITE FOR INVEAENT

It was clear to the DAI team that there are specific opportunities that could be attractive to a The country has a relativelyWestern investor or food processing or marketing company in Bulgaria.

good infrastructure and many of the plants are located in an area where they have multiple sources of

transport for export. There is a noticeable positive difference in the attitudes of the managers and

entrepreneur. Bulgaria offers potential investors several advantages:

0 Good climate and growing season for fruit and vegetables, temperate climate free of

catastrophic weather swings that ire common in other temperate locations, and rich soils;

An adequate supply of skilled and unskilled labor for the plants and reportedly adequate,* affordable labor for the work involved in this type agriculture;

* A strong entrepreneurial spirit among the management of many of the plants visited;

although not a Western work ethic, it did indicate a strong drive to succeed combined with

a generally European business structure that is not found in other parts of Eastern Europe;

and

* Although the signals are sometimes mixed, a government that seems to be in support of a

carefully organized transition to the private sector and recognizes the strategic importance

of the fruit and vegetable subsector.

However, few agribusiness operations will provide turnkey investments. In large measure the

organizations will have to be restructured, resulting in spin-off privatization, or they will enter into

contracting or leasing arrangements when the organization is restructured. All the factories the team saw

had lines that appeared to be uneconomic.

It is going to be essential for processors to get high-quality product since one of the potential markets is high-quality, glass-packed product available to private labelers in the West. At present the prices for process-grade raw materials are extremely low. It will require a bit of mind set reversal but the nimagers of the plants need to be shown through financial analysis how paying higher prices for higher-quality raw materials can pay off because of higher values for the packed goods. This is also an important market as well because it is largely driven by contract production, which will help to lend support to the presently unstable processing subsector.

The team was impressed with the number of factories in the processed fruit and vegetable subsector that have expanded or started exporting to new markets; the volumes are small but the direction is positive. A significant increase in the availability of Western market products was noted during 1992. Another positive note for Bulgaria is the opening of the Bulgarian-American Entrprise Fund, and the announcement that OPIC would be providing equity investments and loan guarantees in addition to its insurance for U.S. company investments.

Food product exports have increased since 1991 in a limited number of cases (an example is jams to the European Community and the United States). Domestic and imported products are widely available throughout Bulgaria, something that was not true only three years ago. Prices are much higher because of rapid inflation over the last 18 months but the thinking is that this is being brought under control by strict monetary reform.

It is clear that rich opportunities for indirect and nondivestiture privatization exist as well as for more traditional divestiture in a few cases. Facilities that meet Western standards can be leased, contracted for production, or spun off into separate joint ventures. In some cases the plants might be sufficiently modern to allow a management contract arrangement to provide a workable sohion. In all of these cases the government would be relieved of the cost of carrying factories operating well below the breakeven point, and technical assistance would be available to help upgrade skills in anticipation of full divestiture in many cases.

OBSERVATIONS ON THE INDUSTRY

As a result of our visits to several representative plants throughout the country we can make some general observations about the condition and health of the industry. In almost all cases the buildings and production lines are 25-30 years old. The lines are frequently of Bulgarian manufacture or Bulgarian with some parts from Hungary or Ea l Germany. These older lines are frequently in poor condition, are generally of poor construction, and appear to be nearly worn out.

Preventative maintenance was almost nonexistent in the plants we visited. The standard procedure appeared to be rehabilitation as needed to keep the lines in operation, with no thought of working on them until the next season's operation. This was evident in lines that had already completed processing for the year where rubber or fiber belts were left exposed to the elements, the equipment was not thoroughly cleaned, and in most cases critical parts had not been greased, oiled, and prepared for winter weather. In analyses for business plans and profiles of potential investment joint ventures, the cost in time and product from frequent down time will have to be considered along with the capital cost of partial or complete replacement of processing lines within a short period of time.

In contrast, although they were old and frequently badly in need of repair, the buildings were constructed to be spacious with high ceilings and the ability to set machinery in the straight throw manner

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preferred in the United States for modern plants. The lack of preventative, or in many cases general,

maintenance was obvious in the buildings but structurally most were sound and useable. Another positive

factor for the plants was the existence of numerous buildings so that operations or lines could be laid out

and separated if desirable.

Ancillary or nonproductive assets are not common in this subsector of Bulgaria. Steam generation Several

plants were frequently part of the operation but this can be argued to be a logical inclusion.

plants also had retail outlets; again, these could be construed to be part of the overall integrated operation Several of the older plants had apartmentsand are not uncommon in Western businesses in this sector.

or houses for some of their workers or health care facilities, but these were so limited that disposition

of ancillary assets will not be a major focus or problem for privatization activities in this sector.

The managers and technical personnel were all well trained and competent in the technical fields

of specialty fbr plant operation. Lacking were capabilities in management, marketing, sales, advertising,

promotion, and sophisticated financial analysis. These areas in which they are weak are just those areas The loss of former markets and the transitionthat are most important to a business in a market economy.

toward market economics has magnified the importance of these missing skills dramatically in the form Access to these skillsof increased inventories, cash flow crises, and inability to forge new market links.

through technical aasistance programs, additional training, or additional employees will be essential for

those firms that will survive.

for improved sanitation and general cleanliness. InThere is a distinct need observed to that weapproximately half the operations visited the sanitation level in the plants was comparable

would expect in a Western plant; the remaining plants were below par. Virtually all the plants suffered

from cluttered and decidedly untidy operations. These ranged from stacks of empty cans, bottles, empty

used jars, fruit boxes, and other materials randomly strewn around the sites. Since most of the plants

have a large number of buildings and are generally quite large in land area, a more organized appearance

could easily be conveyed. Since we did not see any organized control efforts for rodents and observed evidence, this lack of external cleanliness and the lack ofnumerous buildings in which birds were ini

internal sanitation in some of the plants leave a rather large problem that needs to be addressed through

technical assistance. One of the most effective teaching devices may be getting some plant managers to

U.S. plants on exchange visits and information on FDA requirements for licensing so they recognize the

extent of the problem.

THE FUTURE FOR PROCFSSED PRODUCTS

For the Bulgarian processed fruit and vegetable subsector to survive, it will have to address

several key problems:

The primary former market of the subsector was the former Soviet Union. As a result,0

- There is a substantial amount of overcapacity with the resultant high fixed costs of

production due to low volume; and

In most cases the quality of the produce is not suitable for other markets because of plant-or line shortcomings in handling, packaging, and sanitation;

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" With a very few notable exceptions the plants are relatively small in comparison to similar operations in other countries;

* A wide variety of products are produced in spite of the small size so that few lines can claim to have economies of scale;

" As a result of the loss of the former Soviet Union market, not only has Bulgaria lost its markets but inventories estinuted to be in excess of $50 million have built up without much hope for a sale;

* Because of this, the industry is strapped for working capital cash at the same time that government support is waning in response to privatization pressures;

* Compounding this problem are interest rates that are reportedly from 50-70 percent on working capital loans. Banks are preoccupied with debt collection. In the past the government has written off loans; this is not expected to occur in the future although the Ministry of Industry has indicated that it will take over old debt, as a government obligation, as part of a privatization process for the processed fruit and vegetable subsector; and

* Land restitution is reducing the scale of the farms to potentially uneconomic levels. This fact, combined with the inexperience of farmers who are also strapped for cash, means that they may turn their hands to field crops that require less input rather than to the fruit and vegetables needed to fuel the plants.

The land restitution process has proved to be confusing and messy. Early concerns about its potential effect on the processing industry have been partially validated by the past season in which enterprises had to purchase products from all over the country to supply their needs.

Banks are being restructured through the Bank Consolidation Company. This includes rationalization of loan portfolios and consolidation of the banking community.

The decision to build inventories in the face of market loss resulted from a decision that is illustrative of the continued central planning mentality. Both the ministry and the plant managers determined that it was preferable to buy the product from the farmers to pL'eserve their economic viability and produce a product that might, however, not be sold. Although a market-oriented plant might decide to buy product to honor contracts or keep its farmer growers alive, the plant would also recognize that the product mix and packaging would have to adapt to the new market conditions or the additional costs of processing and packaging would not be met by increasing returns.

15

CHAPTER THREE

LEGAL, REGULATORY, AND INSTITUTIONAL FRAMEWORK

Bulgaria has made significant strides over the past two years to enact laws designed to support a market economy. However, government officials have not yet formulated a comprehensive legal framework nor created and strengthened the legal institutions needed to implement it. Defining real property rights and creating the conditions for free and fair competition are still largely unfinished. Other areas of law, including intellectual property, company, foreign investment, and contract law, are less problematic.1

Bulgaria's new constitution was created in July 1991. In its present form, it represents a radical departure from the past. Most socialist phraseology is gone, replaced by democratically oriented legal principles and values. The new constitution provides reasonable protection for the property and economic rights of individuals and creates a favorable legal basis for the development of the private sector for the first time since the end of World War II. The reform of property rights is the most complicated legal challenge in Bulgaria. Reversing marxist attitudes and the laws and institutions that embody them is a sine qua non for private sector development.2

THE LEGAL AND INSTITUTIONAL FRAMEWORK OF PRIVATIZATION

A major challenge in developing a market economy in Bulgaria is to eliminate the virtual monopoly of the state over commercial property that existed during the focialist period. This entails both privatizing commercial property (or making restitution to previous owners) and developing an active rental market in property still held by the state.

Identifying a Seller

Before state property can be sold or leased, one must first define the actual owner. This is an imp3rtant step for Bulgaria. Because it had a tightly planned economy, ownership of social property was indeterminate during the socialist period. The relevant overseeing ministries have ultimate decision­making authority with regard to such property. In the cases of Selvikonserv and Storco Pleven, both enterprises are owned by the Ministry of Industry.

The Law for Agricultural Land Ownership and Use, passed in February 1991, was designed to return parcels of land to their original owners. At the end of 1991, only 10 percent of the land previously owned or held in title by the state had been claimed. This was of great concern because it could force the government to continue operation of state and collective farms. Restitution claims have increased during 1992 but major blocks of land remain in state hands. One major problem that is

I Cheryl W. Gray and Peter Ianachkov, "Bulgaria's Evolving Legal Framework for Private

Sector Development," The World Bank, Working Paper 906, May 1992.

2 Ibid.

Previous Page Blank

16

becoming more and more evident is the small number of owners who wish to return to the land to farm

it. This is good economically because it means consolidation will result in farms large enough to be

viable. But the farmers who survive to rent these larger farms need credit, machinery, and infrastructure,

which had not existed before in Bulgaria.

This may force the government to maintain state and cooperative farms until the land is either

claimed or can be sold to citizens desiring to farm. Another law limits private ownership to 20 hectares per person and requires that agricultural land be farmed. This has further limited the ability to produce

In 1992 the state still owned over 90 percent of the wealth in the country.efficient operating units.

An Institutional Vehicle for Privatization

For a successful transfer of ownership to occur, an institutional vehicle for privatization must

exist. Experience shows that for institutional vehicles to be effective, they must be easy to access and

they must be transparent. Currently, the Bulgarian institutional framework for privatization isnot very clear. The lack of clarity and thus access to this system stem primarily from the fact that the vehicle has never been tested; no privatization has been realized to date. The lack of transparency may stem from similar reasons but it more likely results from the Government of Bulgaria's unreadiness to give up its

traditional planning and controlling government role.

Clarity

The existing institutional framework has many steps that result in duplication of effort.' For example, to privatize Selvikonserv, DAI is assisting MOI to complete a package of information that will accompany a formal request to Minister Bikov to approve the privatization of the enterprise. Ministry officials, however, are not clear on the documents needed for Mr. Bikov's approval. In the event that Minister Bikov blesses the privatization, MOI will invite independent assessors to submit proposals for

valuating the enterprises. Most likely, these evaluators will have to duplicate much of the work done for the initial request for privatization. Furthermore, once the valuation is completed, a separate oversight commission is charged with the approval of the valuation.

Transparency

The existing institutional framework lacks a set of clearly stated criteria for approvals of the various steps in the privatization process. Minister Bikov's initial approval is supposed to be based on information that shows some potential for the enterprise and a restitution situation that will not make the privatization too complicated. Nevertheless, clear criteria for approvals have not been developed, thus creating opportunities for arbitrary decision making. Similarly, the system currently lacks clear criteria for the valuation oversight commission approval process.

3 Refer to the Bulgarian Privatization Process Chart following the chapter.

17

STRUCTURE OF MODEL BULGARIAN PRIVATIZATION PROCESS'

Minstr of

Motionto Motzorto

Rptwre Concigonceof Aalysi IIlistry of id

I - Restimit

Ninister of

e Decisonto Deddonto ~Yes

J ntepirse Nb Decisonto Yes 4 Yes

4-----iOvsseer

O "

L I

.There oe five soinces foainitiating pitvatization 1For Companies with Assets < 10 IVAlon Levo s.For Companies with Assets • 10 IV~lion Leva •. At this stage the activities are pare far both ministries but remcn separate . Source of Se onserv Motion '.Source of Stoilo Pleven Motion

19

CHAPTER FOUR

PRIVATIZING SELVIKONSERV AND PLEVEN

CANDIDATE SELECTION METHODOLOGY

Bulgaria has approximately 100 state-owned processed fruit and vegetable enterprises. Half of these enterprises are state owned and account for the bulk of production. The rest are cooperatives. Twenty of the state-owned enterprises account for nearly 80 percent of total production. Given the project's time constraints, the DAI team asked representatives from the Ministry of Industry and the Privatization Agency to select about a dozen enterprises that were high on their privatization agenda. The DAI team completed on-site visits for I 1 processed fruit and vegetable enterprises in Bulgaria. These enterprises were evaluated in four general categories:

" Management and employee receptivity, market literacy, and privatization readiness. The process of privatization, including extensive planning and documentation, requires substantial amounts of time and effort. Development of a viable enterprise also entails restructuring, which may affect many positions or change the responsibility of positions. The legal requirements for privatization are onerous, requiring a strong commitment to working within and through the affected government agencies. Commitment from all of the participants in this process is essential.

• Enterprise viability. In cosidering enterprise viability, one considers the competing uses of the plant or other resources, the returns possible in the processed food industry, and the value and condition of the plant and equipment. If the plant can be improved to meet generally accepted processed food standards, we seek to answer the question: Can the enterprise be made financially viable?

• Quality control and sanitation conditions. A plant or enterprise has to recognize and adhere to quality and product standards. These standards will include levels of hygiene sufficient to pass international inspection (or the ability to upgrade to that level) and product consistency. In addition the enterprises have to have facilities and trained personnel to carry on the minimum levels of quality testing. Finally, there has to be a commitment from the management and emloyees on the importance of quality standards.

" Replicability of a privatization readiness prototype. Replicability of the project for other privatization efforts in the processed food industry, other subsectors in agriculture, and other regional or municipal enterprises for ancillary assets isdesired. The target enterprise should be selected so that it has value to the other enterprises in Bulgaria as a model or can be used for training other host country privatization agencies.

Based on the analysis of data gathered from the 11 enterprises, the DAI team selected four for further consideration as privatization candidates under the Bulgaria Food Privatization Project: Brigada, Storco Pleven, Plovdivconserv and Selvikonserv. Following a second site visit and further research on the potential restitution problems each of these choices offered as well as other input from representatives

Table 5 INITIAL EVALUATION OF ELEVEN ENTERPRISES

Plant Name Products

baby food Brigade vegetable/red pepper

20K tons

4 K tons Danovia frozen products

peas/corn concentrate canned products

compotes Kjustendill

frozen food Maritsa jam

green beans tomatoes

canned vegetable Malta concentrates

lots of fruit* dried & reconstituted fruit

compote Piviconsev vegetables

veg. concentrates

compote Pleven IQF veg. & fruit

ketchup concenmrates canned veg. & salad

Management

O.K. receptivity fair market knowledge ready for privatization

poor receptivity fair market knowledge not ready for privatization

O.K. receptivity poor market knowledge not ready for privatization

good receptivity fair market knowledge not ready for privatization

very receptive all managers market literate probably ready ?employee support

good receptivity poor market not ready yet

very receptive market knowledge hard to assess manager quality duo to size believe ready for privatization

Enterprise Viability

Great physical assets poor liquidity poor market position ? potential good product quality

good freezer poor canning did not see concentrate fair liquidity poor market position

poor assets poor liquidity poor market position poor product quality

mixed physical assets poor liquidity poor market position product quality not consistent

good physical assets liquid & solvent (low debt) recognized brands-good location & consistency­good

poor physical assets solvent/ liquid limited market knowledge poor quality

most very good solvent but hi debt good market poe & labels quality good local supply/consistent

Quality Control & Replicbility Sanitation

Among the best very poor

frozen products good fair-good good input control average-poor on overall sanitation

very poor O.K.

varied by line & very high product

Average high clean but cluttered

poor O.K.

high very high bldg new lab clean/well maintained

ketchup Plovdivoonserv tomatoes

red pepper pickles

peas Republica pickles

tomato paste

jams Salvikonserv compotes

apple concentrate Vitamina canning

tomatoes

very receptive very good market knowledge ready for privatization

receptive O.K. market knowledge not ready

vary receptive good market knowledge open to privatization

negative receptivity gook market knowledge not ready

Adequate physical assets One of the best O.K. good market position very good product quality restitution claims

spotty on assets good operations shut poor market position down high debt claims by producers

vary good assets good liquidity

good fair smalllspecialized

good product quality

overall very good assets good not very good no problems with liquidity good product quality

Table 6 SELECTION CRITERIA RANKING OF FOOD PROCESSING ENTERPRISES

Ranking: 1 (bad) to 5 (good)

Enterprises: Brigada A Piviconserv F Vitamina K Donovia B Pleven G Kjustendill C Plovdivconserv H Maritsa D Republica I Melta E Selvikonserv J

A B C D E F G H I J K

1. Management and Employees 4 2 1 2 4 2 4 5 2 5 a. receptivity b. market literate c. readiness

2. Enterprise Viability 3+ 2 1 2 3 2 5 4 2 5 5 a. physical assets b. liquidity c. Solvency d. market position e. product quality f. inputs supply

3. Quality Control

a. lab 5 2 2 3 3 2 3 4 3 3 4

b. qc systems

4. Sanitation

5. Replicability 2 3 3 3 4 2 4 4 3 2

Total Averages: 3.5+ 2.2 1.6 2.4 3.5 2 4.1 4.3 2.4 4 2.8

Selected Companies 4 2 1 3

23

of the Ministry of Industry and the Privatization Agency, Selvikonserv and Storco Pleven were selected as the two privatization candidates.

Phase I of the Bulgaria Food Privatization Project concluded with the completion of a detailed enterprise profile of the two selected privatization candidate and the beginning of the consensus building for their eventual privatization.

THE SELLER

DAI has two counterparts within the Bulgarian Government for the Bulgaria Food Industry Privatization project: the Ministry of Industry and the Privatization Agency. MOI is the current owner of both Selvikonserv and Pleven. However, by law, PA is charged with the actual privatization of enterprises with a book value of long-term assets exceeding 10 million levas (approximately half a million dollars). Thus, the DAI team is working closely with the PA on the privatization of Storco Pleven, an enterprise with balance value of long-term assets well above 10 million.

The Ministry of Industry

Since the privatization Act was adopted in April, the new minister of industry, Rumen Bikov, has drawn up a list of 3,000 state companies with assets of up to Lv 10 million to be privatized. The government suggests that a quarter of the total debt of Bulgaria's 20,000 public sector industrial companies should be canceled in order to make them attractive for potential investors; it estimates that the state companies owe the exchequer more than Lv 54 billion. The state forgave a total of Lv 9 billion in debts owned by state firms in 1991. In 1992, however, the Bulgarian National Bank says it is against any plans to write off state companies' debts.'

Within MOI, the DAI team has identified Mr. Venchev, Director of the MOI Privatization Unit, as the primary counterpart for the Bulgaria Food Industry Privatization Project. Mr. Venchev and his team have cooperated with DAI staff members to identify appropriate candidates for privatization and start the firm-level and state-level steps necessary to accomplish a transfer of ownership by the end of May 1993. As the official owner of the two privatization candidates, the MOI oversees project work for Selvikonserv and Storco Pleven. Nevertheless, as the government body empowered to sign off on a transfer of ownership for enterprises with balance asset value of less than Lv 10 million, MOI is particularly interested in the privatization process for Selvikonserv.

The Privatization Agency

The Privatization Agency's functions, capacity, rights, and obligations are provided by the Law for Transfbrmation and Privatization of State-owned and Municipal Enterprises, ratified by the National Assembly on April 23, 1992. According to the law, the agency is not the sole body authorized to carry out the privatization. PA, headed by Alexander Bozhkov, will take decisions for privatization of state­owned enterprises with a balance value of long-term assets exceeding Lv 10 million. These enterprises

The Economist Intelligence Unit Country Report, Bulgaria, November 3, 1992.

24

comprise about 30 percent of all state enterprises, but at the same time involve state sector employment

of almost 70 percent and an asset representation of more than 80 percent. The responsibilities of the

Agency include giving opinions on the transformation of state enterprisez into commercial companies,

licensing of Bulgarian and foreign valuers, preparation of the annual programs for privatization, as well

as other functions pursuant to the law.2

Within PA, the DAI team has identified Alexander Gevob as another primary counterpart for the Because of their unique mandate by law, PA is concernedBulgaria Food Industry Privatization Project.

only with the privatization process of Storco Pleven.

THE BUYERS

As part of the scope of work for this project, DAI has made contact with a number of firms in orthe U.S. food processing and distribution sector that are potential partners for a joint marketing

investment opportunity with Selvikonserv or Storco Pleven. To date 13 companies have been contacted.

These companies were contacted as a test of the concept and to determine what additional information

they would need to proceed with any kind of cooperative agreement. Many of the firms we will contact in the future are companies that have worked with DAI and DAI personnel in the past in other

investment, marketing, or cooperative arrangements and that we know to have an interest in international expansion.

Many other firms fit the profile for potential interest in the two enterprises involved in this privatization effort. We will begin contacting these firms as soon as we are comfortable that we have

adequate information to respond to their needs and that the process of privatization has moved through

the channels of the Ministry of Industry and the Privatization Agency to the point where approval to

privatize has been given.

The information needs expressed by these companies contacted initially include further

information about the markets, economic competitiveness of the enterprise's products, enterprise business

plan, economic condition of the enterprises, the potential for actual transactions to take place, and

information on the effectiveness of the commercial and privatization regulations to protect their interests

and investment. Many of these issues are being addressed by the legal, accounting, marketing, business

planning, and competitive analysis components of this project.

We expect to be able to deliver the additional information needed by these companies for At this time we expect 25 percent of the firms contacted topreliminary review by the end of March.

have a continuing interest that would entail specific questions to the enterprises. Statistically, one or two

of the remaining firms will have sufficient interest to make field inspection visits. This is the reason that

the number of firms to be contacted will increase substantially once we have adequate data to respond to their needs.

Most U.S. firms have many potential investments; they expect to move quickly and have access

to adequate information for decision making. Few firms will continue active interest in a project when

information in miswer to their questions is not readily available.

2 Information Bulletin, The Privatization Agency, October 1992.

25

The firms, or divisions of firms, contacted to date that have a continuing potential interest are:

- General Foods - Stoneridge - SK Foods - Tri Valley Growers - Sun Pacific - Heinz - Chiquita Brands - International Multi-Products - Sun World - Pillsbury Foods - Sun Light Agri Products - Power Packaging - Con Agia - Hunt Wesson International

We believe it is important to note that these represent initial conversations that have been preliminary in nature. The companies expressed the desire for further information, some of which we were able to deliver from work already completed. They have a continuing interest in learning more. This should not, however, be construed as a commitment to expend markating, research, or analysis funds for further exploration beyond that which we will provide through the project.

PRIVATIZATION STRATEGY

The decision to privatize Selvikonserv and Storco Pleven as whole companies or in smaller parts is up to the Ministry of Industry and the Privatization Agency, respectively. To help them make this decision, the DAI team has completed a privatization option analysis for each enterprise. Once these decisions are taken, the Government of Bulgaria will also need to choose a method for the actual transfer of ownership. The table following the privatization option analysis will assist Bulgarian government officials with this task.

Selvikonserv

Based on four important criteria - maximizing price of state assets, maximizing total country employment, ensuring enterprise viability following privatization, and feasibility of privatization plan ­we have concluded that the optimal privatization plan for Selvikonserv is:

S Selling the enterprise as a whole in its present form.

The DAI team believes that this privatization option is really the only one available. Selvikonserv is already a relatively small enterprise. The company's most promising line is its Terlet Jam operation. Spinning off this operation would leave assets with no value other than what could be received from an asset liquidation.

26

The most important problem associated with selling the enterprise as a whole is what to do with

the excess labor. Selvikonserv currently employs approximately 175 individuals. Forcing the new owner

to retain the existing personnel will greatly reduce the value of the enterprise. The DAI team does not keeprecommend that distortionary incentives be offered to support unviable operations simply to

We suggest that part of the proceeds from the sale be used to either construct anindividuals employed. adequate severance package or implement a retraining and job placement program for workers whose job

are eliminated by the privatization.

Storco Pleven

Based on these same four criteria, we have concluded that the optimal privatization plan for

Storco Pleven is:

0 Divide the enterprise into separate dusters of operations that offer operational synergies

and that allow the use of several forms of privatization for the various dusters.

The DAI team believes that this privatization option offers the most flexibility thus increasing the

possibility of finding one or more marketing or investment joint ventures from outside Bulgaria, and

assures that the highest potential price to the government will be obtained for the assets of Storco Pleven.

The final decision for a privatization plan, of course, will be up to the Privatization Agency.

Therefore, in this memo, we outline several plans and assess them independently as well as against their

alternatives. Four options for privatization could reasonably be considered for this enterprise:

" Privatization of the whole entity as a unit;

" Privatization of the new processing site only;

* Privatization of the metal can fabrication facility; and

A mixture of smaller spin off enterprises using several forms of privatization.*

It is important to note that we are defining privatization in its broad form. Our definition includes

ordinary divestiture of the assets through a sale, but also all the forms of indirect privatization such as

spin off, leasing, contracting out, and other techniques that result in a transfer of control or ownership.

This point is particularly relevant to the fourth option above.

Whole Company Privatization

This option involves a unit divestiture of the entire enterprise, including the uncontested portions

of each of the four sites presently occupied, to an investment group that would include a foreign investor.

Privatizing the whole company as a single unit has obvious advantages. It would allow a single However, this option presentstransaction and the government would not be left with any unsold assets.

several potential problems.

27

First, the government wants to maximize price given a set of constraints it has set. The government should clearly understand that constraints on keeping assets in production and setting minimum levels of employment will drastically reduce the price at which a willing buyer will enter this transaction. It may also put such a severe strain on the potential viability that a buyer might not be attracted. Second, some of the assets may have a negative effect on a combined transaction. It is not uncommon in divestiture and sales for the parts individually to be worth more than the whole. Over the long run, if job creation and economic growth are important, the fewest possible restrictions should be placed on the ability of the companies to function in the marketplace.

Privatizing the New Site

This option would consist of privatizing the new building site which includes the freezing operation and cold storage, peas, tomato, and ketchup caming, and the other lines that would be moved to the site. The other sites would be restituted to the owners or parts of them sold. In addition, the can factory would be split off since it occupies several buildings and could not be accommodated at the new site. This option has the advantage of only moving the lines that have comparative advantage. Since some of the lines would be left behind it is assumed that the government would reduce the number of employees. This should be a substantial reduction since the most labor efficient lines would be moved, being the newest and most cost competitive. If the labor reduction is not sufficient for the proportional change in efficiency, then the price would be reduced downward. This reduction would be more than proportional to the effect on the operation's profit.

In conclusion, this is a preferable solution to that of whole unit privatization since it allows the company to eliminate some potential problems with restitution and old lines. It does not give the flexibility of splitting the freezing from the canning operations. It also ignores the very real possibility that the canning lines at the new site might still have a higher value in parts than in the whole.

Privatization of the Metal Can Fabrication Unit

This option would mean the privatization of the entire fabrication unit consisting of the new welded seam can line, the lids and blanks lines, and the can line for making soldered seam cans. This unit has little linkage to the rest of the operation Eo that splitting it off would have minimal effects. The price of the unit would be reduced if the new owner is forced to take the soldered seam units unless given the option of closing this unit in the near future and relieving the buyer of the employment requirement for this line. The negative effect of this privatization option include the elimination of a line that has demand and operates profitably thus reducing the value of the remaining company.

On the other hand, this unit represents a sensible operating unit. It is not likely that it would be further broken down but rather that the soldered seam unit would eventually be scrapped. It would command a miarket value price that might reduce the government's need to retain high prices on the remaining assets of the company. In short, it is a logical spin-off, would find a buyer, the price is likely to be very competitive, and it does not detract from the rest of the unit. Yet, it may advisable to hold off sale until the disposition of the other assets has been completed since the can factory is providing positive cash flow to the company.

28

Privatization of a Mixed Portfolio

This option involves privatization in pieces, units, or as a whole, whichever is the most effective

in garnering a maximum price for the combined asset sales and employs the largest number of people.

As before, the government can place restrictions on the number of employs retained or on keeping the

assets in operation. It is likely that this policy will reduce the sale value of certain inefficient production

lines and may even preclude their ability to be sold. This option, however, allows the pieces of the

company to be looked at individually so th.. their relative values, potential for management, and viability Since some parts may be morecan be evaluated without the need to keep the whole company intact.

attractive than others, and the sale of some parts may make the sale of the remaining assets difficult or

impossible, a coherent plan would need to be implemented. It will be impossible in this scenario to

assume that all assets will be redeployed. Therefore the plan will call for the largest number of assets

to be sold and minimize diose left unsold including the timing of sales that might affect the other units.

This option allows the most flexibility, gives the DAI team the greatest possibility of finding one

or more marketing or investment joint ventures from outside Bulgaria, and assures that the highest

potential price to the government will be obtained for the assets of Storco Pleven. The remaining units

will have individual business plans completed for them and will be purchased by companies or individuals The governmentknowledgeable about those lines who have the best opportunity to make them viable.

can place restrictions on the minimum operation of lines or employment levels with the understanding

that this will have the effect of reducing the price substantially in order to assure the viability of the

This option also allows the maximum potential use of indirect privatization, a veryremaining firm. powerful tool for moving some hard-to-sell assets into the marketplace and creating employment.

The DAI team has frequently pointed out that the best way to proceed with privatization is to find

those companies that are desirable to potential buyers, and structure a sale in parts as necessary to ensure

that the highest price is obtained. These are the companies that will create economic growth and generate

future employment. It also recognizes that there is excess capacity in the fruit and vegetable processing sector and some of Bulgarian's plants will have to be liquidated or turned to another use.

It is the DAI team's opinion that it would be a serious error to restrict the sale of assets to the

company as a whole. Requiring that all the sales close at the same time to minimize chaos is possible and acceptable. A mixture of options is by far the best. We believe that the following hypothetical

scenario illustrates the strength of the privatization tools and options that will allow the sale value to be

maximized, provide the maximum option for retaining employment, and maximize viability of the remaining assets.

Recommended Action Plan

Based on the above arguments, we recommend the foutth option: privatization of a mixed

portfolio for Pleven. We will assume that the can fabrication, r.oncentrate, ketchup, and pea lines are the most desirable parts of this operation. These units would not be sold until the other parts of the

company had either been marketed or art c!early not marketablk. We would request that the employment

restrictions be limited to a requirement to keep ahe empioyees of the firm for any positions that would

be retained (thus protecting the employees from being let go and replaced by someone else in the same position).

29

The team would work with the management and the Privatization Agency to determine how best to split and package the investment options. They would also work together to determine what ancillary services might best be split off either to enhance the salability of the remainder or to increase the overall price of the assets. For instance the laboratory, transportation, the canteen, and other similar business services might be contracted out to separate companies (or companies made up of the employees in these units). They would buy the equipment and lease space from the company as needed. The retail stores could be contracted, leased, or sold individually or in groups. The can line could be separated for sale. The frt,,2er and storage could te offered separately. If restitution issues can be cleared the concentrate and jam lines could be offered separately.

As an alternative, those wishing to buy the lines might purchase them after they have been moved to the new site. This would be preferable since the access is better, the sanitary conditions improved, and they would be closer to the labs and other services. Four separate options might be considered for the operations in the new site.

" First, they could be leased or contracted out, with a separate company or the government retaining the assets but increasing the revenue and eliminating its carrying costs;

* The lines could be sold with a separate owner for the building who would lease space. This owner might also provide lab, canteen, transport, training, or employment origination services to the operators of the lines;

• Third, the building could be condominiumized so that each line or groups of lines along with their proportionate share of the building would be sold, leased, or contracted. The building could contract maintenance services or they could be provided by a service company who also provide the lab, canteen, transport, or other services; and

• Finally, the unit could be sold as a whole with the possible options of selling or contracting out the services mentioned before, such as the laboratory.

This combination of options allows a wide range of potential buyers to be solicited, gives the maximum opportunity for Bulgarians to participate in the sale of assets or continuing businesses, and maximizes employment generation. On the other hand, sale of the unit as a single company limits the potential buyers to a handful at most, effectively eliminates Bulgarians from participating in the business or asset sales, and is likely to result in a company that will close many of its lines and eliminate employment as soon as the mandatory period is up, leaving it to operate the one or several production units it really wanted while reducing the government sale revenues for restrictions that will only have a short-term effect and reducing the potential for internal economic growth.

30

Table 7 METHODS OF PRIVATIZATION - SUMMARY

Methods

Publio offering of shares.

Private sale of shares.

Sale of government or enterprise assets.

Fragmentation.

New private investment in SOE.

Management/employee buy-out.

Characteristics

Distribution to the general public of all part of shares in public limited company (as a going concern),

Sale of all or part of government shareholding in a stock corporation (as a going concern) to a single entity or group. Can take various forms such as a direct acquisition by another corporate entity or a private placement targeting institutional investors. Can be full or partial privatization (i.e., transformation into joint venture),

Sale of assets (instead of shares). Private sale.

Reorganization of a SOE into several entitles (or one holding company and several subsidiaries). Each entity will be then be privatized separately.

Primary share issue subscribed by this private sector (dilution of government's equity position instead of distribution of shares).

Acquisition by management and/or workforce of controlling interest in SOE. Leveraged management/employee buy-out (LMBO consists of purchase of shares on credit extended by either the seller (government) or by financial institutions.

Procedures

If SOE is in required condition, standard processing of public offering on the basis of prospectus. If not in required form or condition, then readying process necessary. Offer can be on fixed price or tender price.

Sale may result from negotiation or competitive bidding process. May be done ad hoe or may be subject to mandatory country procedures or guidelines on valuation, prequalification, evaluation of proposals, terms of payment, etc. In some cases, prior restructuring necessary. Involves investor search.

Alternatives: sale of assets by government disposal of some assets by SOE; dissolution of SOE and sale of all assets; other. Procedures for pivate sale of shares generally apply.

Depends on structure of SOE.

Public offering or private issue of new shares on basis of standard procedures for new issues, possibly in conjunction with disposal of government equity. New private investment may be for capitalization of new company embodying assets transferred by government.

Negotiations by government, management, employees and lenders to cover wide range issues.

31

Leases and management No ownership transfer. Under lease, No standard method; see actual contracts. fee is payable to owner of productive cases in text.

facilities, lessee assumes full commercial risk. Under management contract, owner pays for management skills, while manager has full management and operational control. Many variations exist.

Preferred Applications and Special Features Lm4-,Iementation Issues

- SeE sound going concern with reasona:3e earning - Structure or condition of SOE may not permit potential or can be readied to become so. public offering feasibility of restructuring to be

- Objective is widespread ownership. a3sessed. - Existence of equity market or feasibility of - Mechanisms necessary to achieve an maintain

structured offering, wide-spread ownership and possibly limit foreign - Generally more appropriate for larger offerings than holdings.

direct sale. - Pricing mechanism to be defined. - Often more acceptable politically. - Distribution mochanisms may need to be

introduced to compensate for weakness of equity markets.

- Because of flexibility preferred method for weak - SOE may need be prior financial restructuring; performing enterprises, difficult decision on whether to rehabilitate prior to

- In absence or equity market, may be only sale. alternative for sale as a going concern. - Employment.

- Size of enterprise may not justify public offering. - Need for mandatory procedures. - Preliminary step to public offering when presence

of leveraged party necessary to turn enterprise around.

- New owner known and can be evaluated. Offers flexibility in negotiation, such as obtaining specific commitments from purchaser. Purchaser may bring benefits (management skills, technology, market access, etc.).

- Implies SOE is sold with assets and liabilities (there are some exceptions).

- Where sale of shares not feasible or objective is - If assets are sold as a result of liquidation or major sale of individual assets. restructuring, related issues arise.

- Permits privatization of SOEs not salable as going - Relating debt liabilities often not assumed by concern. purchaser.

- Often results in separation of assets and liabilities.

- Where objectives to privatize only certain - Depends on privatization method applied to components; where SeE is a monopoly, and break- individual entities. up will improve competition; or where market will not absorb whole SOE.

- Permits privatization of component parts when no taker for the whole.

- Permits application of different methods to different parts.

- Applicable where primary objective not divestiture - Implementation issues related to public offering but provision of new equity by private sector, private sale of shares or transfer of assets may

- Addresses funding problems of undercapitalized arise. enterprises. Offers flexibility: used as first step to, and in conjunction with, sale of government­held equity.

32

- SOE must typically have competent. professional management and skilled, stable workforce.

- Leverage buy-out a means of transfer to management and employees even with limited wealth; incentive to productivity.

- May be solution for SOE not saleable otherwise. - May be solution to employment problems.

- May be preferred where privatization of ownership of government or SOE assets not appropriate. May be intermediate solutions rendering subsequent sale possible.

- Sate unable or unwilling to transfer ownership to private sector but wants privato sector management.

- May also be planned as an intermediate step to full privatization.

- Cash flow or other security required as underlying element of LMBO.

- Risk to employees.

- Continued financial liabilities of state with respect to ownership of assets.

- Under management contract, owner may still need to inject funds to support operations. Maintenance/renewal obligations.

33

CHAPTER FIVE

PHASE II WORK PLAN

During Phase U of the Bulgaria Food Industry Project, the DAI team will concentrate on implementation of pilot privatization for companies, or segments of companies, that were selected in Phase I. The main objective of Phase R is to complete a successful privatization readiness process that will take the enterprises to the point of transfer of ownership.

Each of the pilot processes will be undertaken with a mix of professionals including financial planners, attorneys, valuation and financial and accounting analysts, economists, management specialists, and industrial engineers, as may be required. To complete the second phase of this project, the DAI team will:

* Based on Phase I, develop an approach for the implementation of the privatization process;

* Complete an assessment of privatization candidates including comparative and market analysis and a survey of ancillary assets;

• Build counterpart consensus for privatization;

• Develop a plan to complete legal documentation and actions needed for transfer of ownership;

* Restate historical, present, and projected financial statements into International Accounting Standards and develop due diligence level information on the enterprises and activities of company;

* With appropriate government officials and selected company management, determine

method of valuation, potential sale price, and potential investors;

* Develop business plans including a proposed market strategy; and

* Assess environmental risks of existing and proposed operations.

Overall Approach. The first step of Phase R1 of the Bulgaria Food Industry Project is to develop an approach for the implementation of the privatization process. This plan will serve as a road map for Phase II efforts. It will be based on clear, agreed-upon objectives of the transfer of ownership. The plan will also be based on the selected method of privatization. During this step, the team will also begin to identify potential foreign investors in the processed food sector and ways to increase their awareness about the Bulgarian market.

General Assessment. During Phase I and the early part of Phase II the team will begin a general assessment of the selected privatization candidates. This assessment will include acomparative advantage study of the subsector(s) and a market study. When combined, these two sources of information will yield a more detailed understanding of the companies' export and domestic market potential as well as their long-term competitive position. The team will also assess employment, production patterns, and

34

efficiency, using comparable international standards, and develop recommendations for enhancement.

Although this initial assessment will be largely technical in nature, the team will maintain a due diligence,

research, and documentation process throughout most of Phase II.

Counterpart Consensus. Concomitant with the general assessment process, the DAI team will craft a

consensus model among the interested parties in the privatization process. Assuring consensus among

all the stakeholders will result in a network of relationships to facilitate access to data and action channels

resulting in more efficient decision making by enterprise and government representatives. To build this

network of relationships, the team will first identify key players in the privatization of the selected

companies, and assess their needs and agenda for the process. In addition the team will build

relationships with government officials in the national and local governments who oversee the

privatization activity. Legal and commercial documentation of the transfer of ownership process, the

steps necessary to meet government requirements, and an assessment of the legal environment for

privatization of land or enterprises will also begin during this step.

Legal Plan for Transfer of Ownershp. The project team will develop the documentation and legal procedure required to complete the transfer of ownership. This will include the services of a U.S. lawyer who will analyze the local legal conditions, the laws passed and those in process, and provide recommendations on the steps necessary to comply with these laws and regulations. This will provide both a plan and the appropriate legal documentation for the transaction to occur.

Restatement of Financial Statements. The DAI team will develop historical financial analysis and projected earnings and loss statements, using standard practices developed for conversion of Soviet-style accounting to GAPP or other internationally accepted standard(s). The twam will also continue the intensive process of collecting and analyzing the due diligence and technical data needed to prepare an offering prospectus. The financial data collected will be used to assess the financial performance of the company and to develop pro forma projections for the business plan. Financial data will include cash flow requirements of the planned privatization, taking into consideration existing debt, capital expenditure requirements, and other related costs.

Valuation. The team will also provide advice and recommendations on valuation, potential sale price (if applicable), and types of domestic or foreign investment that might be attracted. Within the limits of the available data, the team will develop pro formas to determine the productive value of existing assets. This information will be used as an input to the business planning process but also provides valuable guidance to the enterprise managers and to government officials who must make decisions about the privatization proposals.

Develop Business Plans for Selected Company. With the information from the valuation, the due diligence, and general, market, and comparative advantage assessments, the team will develop alternative strategies for the company to follow. The business plan will require the team to evaluate present and potential markets in the light of privatization. It will also be necessary to consider the potentially different operating structures and the resultant impact on marketing, strategy, and operations to be integrated into the business plan and strategy. The role of the company in the domestic economy, the impact of employment changes on the local economy, and long-term potential for the subsector domestically and internationally will be evaluated with the information made available by the project team.

Assess Environmental Risks. As a part of the ongoing concern A.I.D. has shown for the environmental issues of processing industries in Eastern Europe, a member of the team will analyze potential environmental risks for existing or planned operations. This analysis is not intended to be an

35

Menvironmental assessment," but will identify potential hazards or risks, suggest sources of technical or other assistance to deal with them, and most importantly alert the enterprise, the government, and A.I.D. to the potential hazard. Although we may not be able to determine the level of risk we will be able to provide input on whether further professional engineering evaluation isnecessary and identify other risks to the successful business. Environmental evaluation is programmed to occur during the planning and strategy process to ensure that the information is available when budgets for operations and capital improvement are being prepared.

37

ANNEX

ENTERPRISE PROFILES

39

Storco Pleven Enterprise Profile

Bulgaria

41

ENTERPRISE PROFILE

January 15, 1993

INVESTMENT OPPORTUNITY

Storco Pleven presents a uniq-!-. opportunity for a growing food company to expand access to European markets. The enterprise's highly diversified capabilities allow its managers to respond to sudden market changes and control production decisions. Storco Pleven's capacity includes an excellent opportunity to operate a three-stage fruit and vegetable concentrator strategically set up to produce ketchup, high-value­added fruit filling for pastries, and concentrated liectar for fruit drinks for export to EC and Mddle East markets. The enterprise offers further opportunity to diversify cash flow through the operation of a state­of-the-art, welded-seam, fully automated Italian Cevolani metal can fabrication line that already has an established market share in Bulgaria in addition to supplying the enterprise's pea, tomato, and mixed vegetable lines. Storco Pleven also offers the opportunity to control a modern Walter Rau frozen fruit and vegetable processing line with automated fillers and a 3-ton/hour Frigoscandia individual quantity freezing (IQF) tunnel.

43

.:OVERVIEW

Enterprise Name: Storco Pleven

General Directjr: Dip. Ing. Dimitar Angelov Makaveev Telephone: 064/3-32-11 (216) Fax: 064/3-72-29 Telex: 3-45-02

Location/Address: 5800 Pleven BG 80 G. Kotschev Str. Pleven, Bulgaria

Ownership Strusture:

Single-person Limited Liability Company, 100% state owned. Established in 1936. Enterprise currently operates in four different sites, three of which have legal claims on them. Management plans to move operating lines from sites with claims to a new, larger site that has no claims and already houses over 50% of production capacity.

Business Description:

One of the largest and most diversified processed fruit and vegetable enterprises in Bulgaria with frozen, canned, and concentrated fruit and vegetable operations, as well as jam, ketchup, and modem welded-seam can fabrication operations.

Plant Description

Aggregate Size (m2): 67,598 Capacity (tons): 31,000 finished product Property (hectares): 15+ Number of Buildings: 39 (book value 12.1 million leva) Number of Employees: 561 Permanent (176 Administrators)

540 Seasonal

Annual Sales 1991 1992 (9 months)

Volume (tons) Food Products 12,578 5,176

Value (million leva) 193.3 99.5 Food Products % 49% 49% Metal Cans % 22% 26% Retail Store Sales 9% 19% Sales of Raw Materials 19% 1% Other Revenues I% 5%

5)9 1,

44

BUSINESS'DESCRIPTON'

Products

IQF: Peas, Gumbo, Raspberries, Red Peppers, Sour Cherries, Plums. (Bulgarian 500-g cans sealed with wax, 10- to 17-kg cardboard boxes lined with polyethelene)

Concentrates: Ketchup, Tomato Paste. (F-algarian 850- and 425-g cans, 340-ml plastic, 340-, 450-, and 500- ml glass)

Jam: Raspberry, Strawberry, Cherry and Sour Cherry, Plum, Apricot, Mixed Fruits. (370- and 454-g glass jars with twist-off caps)

Nectar: Plum, Cherry Apple.(530-g glass jar with twist-off cap)

Fruit Compote': Plum, Apricot, Cherry, Strawberry, Sour Cherry, Peaches, Prunes, Peeled

and Unpeeled Whole Tomatoes. (720-g glass jar with twist-off caps)

Canned Vegetables: Peas, Sliced and Whole Peppers, Pickles, Gherkins. (4.15-kg, 820-850, 425­

440, and 560 metal can and 800-g press-on 650-700, 270-g, and 2.65-kg glass jar with twist-off caps)

Metal Cans: Several sizes

Sales of Food Products:

1991 1992 (9 months) Volume (tons) 12,578 5,176

Domestic 38% 19% Exports 62% 81% % of Exports

NIS2 60% 38% Germany 19% 15% Other 21% 47%

Value (million leva) 95.5 48.5 Domestic 39% 19% Exports 61% 81%

Fruit stewed or cooked in syrup.

2 Newly Independent States of the former Soviet Union.

2

45

RODUCTION AND PLANT DESCRIPTION: ...... .. ;i:I!i:! I~...... ] i ,I'E ..

RELEVANT PRODUCTION STATISTICS

Production (tons) Food Products Metal Cans

Payroll (million leva)

Inveatories/Raw Material (tons)

Inventories/Intermediate Product (tons)

Inventories/Finished (tons)

1991 1992'

17,777 6,161

23.7 21.7

360 128

3,795 2,159

180 2,567

MACHINERY USED IN PRODUCTION

Type Manufacturer

New site:

Ketchup Italian Bulgarian

Canned Peas Hungarian

Hungarian

Concentrator Bulgarian

Whole Tomatoes Bulgarian

Pealed Tomatoes Bulgarian

Mixed Vegetable Bulgarian Rotary Sterilizer German

(Rotomat)

IQF Fruit and Holland Vegetable Frigoskandia Tunnel

Walter Raw

9 months.

Book Value (million leva)

3.5 0

0.9

0

0.8

0.2 8.0

27.6

3

# Units

1 1

1

1

1

1

1

1 2

1

Capacity Age (years)

10 t/8hr 1 10+

8 t/hr 7

8 t/hr 13

300 t/shift 4

16 t/shift 2

4 t/hr

8 t/shift 2 2

5 t/hr 2

46

Metal Can Fabrication Site:

Nectar Bulgarian 0.3 1 4 t/hour 10

Concentrator' Italian 0 2 300 t/shift 24 & 15

Metal can Cevolani 3.6 1 400/minute 2 0 1 27

Old Pepper Mill Site:

Jam Bulgarian 1 3.5 t/shift 2

Vacuum Concentrator Bulgarian 4 300 kg/load 2 700 kog/load

Ajvar and Pfefferoni Bulgarian 1.3 1 3.5 t/shift 2

Administration Building Site:

Canned Pork and Bulgarian 0.1 1 5 Bean Sterilizer Dutch &Bulgarian 0 1 20 & 36 Syrup Bulgarian 0 1 3-4 thousand 14

.bottles/hour

OTHER POSSESSIONS

Owns 3 raw material concentration sites and 40 retail shops in Pleven. The retail shops employ 67 employees. Storco Pleven owns all of the buildings. On average, 40% of these stores' sales is made up of products made at Storco; 60% is made in other factories.

ENERGY AND INDIRECT INPUTS

Owns electrical substation; water from combination of wells and municipal system.

ACCESS TO MAJOR TRANSPORTATION NETWORKS

Good access to main road. Railway on site.

TRANSPORTATION USED IN SHIPMENT OF PRODUCT

Owns 56 trucks accounting in total for 341 tons of products. 90% of their shipments are delivered by trucks, 10% by rail. Approximately 25% of the total distribution costs are paid by Storco Pleven; the rest is paid by the buyers.

Three-pass system.

4

4

47

MA AGEM ENT BIOGRISI

General Manager

Production Manager

Economic Manager

Metal Packing Site Manager

Chief of Quality Control

Chief Accountant

Lawyer

Dimitar Angelov Makaveev 54 years of age; degree from Higher Food Industry Institute in Plovdiv; worked in Storco for 22 years; General Manager for 10 months; other positions in Storco include Chief of Sites, Technology Engineer, Department Chief, Shift Chief, and Worker.

Boris Dachev 53 years of age; degree from Higher Food Industry Institute in Plovdiv; worked in Storco for 9 years; Production Manager for 9 months; other positions in Storco include Deputy Chief of Site and Shift Chief.

Elen Genchev 59 years of age; degree from Higher Finance and Economy Institute in Svishtov; worked in Storco for 20 years; Economic Manager for 10 months; other positions in Storco include Chief Accountant, Deputy Chief Accountant, and Senior Accountant.

Alexander Petkov 53 years of age; degree in chemistry from Sofia University; worked in Storco for 26 years; Site Manager for 10 months; other positions in Storco include Deputy Manager, Chief Specialist, Chief of Technology, Chief of Shift Technology, Chief of Laboratory, and Laboratory Technician.

lordanka Mazkova 49 years of age; degree in chemistry from Sofia University; worked in Storco for 18 years; Chief of Quality Control for 6 months; other positions in Storco include Chemistry Specialist, Chief of Metal Packing Site, Chief of Chemical Laboratory, and Laboratory Technician.

Margarita Tzvetarova 51 years of age; degree from Higher Finance and Economy Institute in Svishtov; worked in Storeo -or 26 years; Chief Accountant for 8 months; other positions in Storco include Deputy Chief Accountant and Accountant.

Boris Tzvetkov 55 years of age; degree in law from Sofia University; worked as Lawyer in Storco for 3 months.

5

49

ANNEX

FINANCIAL STATEMENTS'

Previous Pag Bl

These financial statements were provided by Storco Pleven and have not been checked by DAI accountants.

Expense Items

a I. Ordinary expenses 1. Decrease of products

Instore, work in progressand deferred cost

2. Cost of materials and hired services:

a) cost of materials

b) cost of hired services 3. Personal Costs:

a) Wages and other remuneration

b)social security and other welfare allowances

4. Depreciation of tangibleand amortization of Intangible non-current assets

5. Other Costs

Including Inventory Write - downs

6. Book value of sold merchandise

TotalI. II. Financial Expenses

7. Interest on loans

8. Losses on securities: a)from sale

b) from write - downs I 9. Losses from currency

exchange rate fluctuations

TotalII II. Extraordinary Expenses 10. From management

operations11. Other extraordinary

expenses Total III

IV.Taxes 12. Profit tax 13. Other taxes

Total IV Total expenses (+.++iV)

V. Current period profitGrand total (I+II+III+IV+V)

STATE MENT of Income and Expenses

of Storco Pleven Full Year 1991 and January 1 - September 30, 1992 Amount (.000 leva)previous current Income Items year year

1 2 a i. Ordinary Income 1. Net income from sales

6,7711

2. productionsubsidies

137,085 70,867 3. State Budget Grants 4. cost of non- current

11,392 4,345, asset production

14,002 16,161

4,760 5,631

5. Increase of products in store work in progressand deferred Income

6. Other Income

Total I.

2,877 3,635 1I. Financial Income Totals

3,056

43,129

216,301

49,530

1,418

923

51,871

1,076

351 1,427

0

269599

269,599

1,617

16,223

125,250

45,988

45,250

738

45,988

29

7,526 7,755

0

178,993

178,993

7. Interest from Income

8. Income from Participations Including dividends Other

9. Income from transactions with securities

10. Gains from currencyexchange rate fluctuations

ill. Extraordinary Income

11. From management operations

12. Other extraordinary Income Total III

Total income

(1+11+111)IV. Current period loss

Grand total (I+Il+lII+IV)

Amount (,000 leva)previous current year year

1 2

193.343 94701

1,763

64,321 30,461

5,187

259,427 130,349 2,527 1,354

296 988

3

2,228 366

887

1,002 1,506 1,889 1,506

263,843 133,2095,756 45,784

269,599 178.993

59 BALANCE SHEET

of Storco Pleven 1991 Full Year and Janau I - September 30, 1992

ASSETS LIABILITIES Amount '0,000 leva) Amount (0,000 le

SELECTIONS, Current year SELECTIONS, GROUPS, pre- cor- bal- GROUPS,

ITEMS vious value rect- ance ITEMS Previous Curr year ion sheet Year Ye

value a 1 2 3 4 a 1 2

A. Non-current A. Equity Assets I

I. Tangibleassets I. Capital1. Buildings, lands, 1. Authorized (initial)

forests and Capitalperennials 12,573 16,532 4,436 12,101 28,865 47,

2. Plant and 2. Additional capitalequipment 41,638 69,953 14,762 55,191

3. Other 1,914 5,148 1,733 3,415 Group I Total 28,865 47, 4. Tangible II. Reserves

non-current assets in progress 4,000 4,646 13,507 4,

Group I Total 60,125 75,353 Il. Profit I. Intangibleassets 1. Undistributed prior

period profit1. Incorperation and 2. Current year profit

expa-sion costs 2. Products of

research and Group HI Total development 0

3. Patents, licenses, Section A Total concessions, (I+11+1I) know-how, trade- 42,372 51,marks, goodwill B. Borrowings and software J

Group I Total 0 . Loans ll Financialassets 203 228 1. Short-term loans 65,345 101, 1. Participation 2. Long-term loans 46,015 98, 2. Other long-term 3. Debenture and

securities bonds loans i 3. Long-term loans Group I Total 111,360 199,

Group III Total 203 228 __

Section A Total II. Payables (I+II+II) 60,328 75581 1

B. Current assets 1. To suppliers 48,558 14,L Inven tories Fo. participation __ _2.

1. Materials 26,444 24,170 3. To employees 1,542 3, 2. Work in progress 5,889 3,405 4. To the budget 319 1, 3. Products, 5. for social security

merchandise and containers 40,176 62,192 127 1,

4. Young and 6. Other fattening live stock _ I 20,810 7,

Group I Total 72,509 89,7671 Group H Total 71,356k27,

II. Receivables 1. From customers 2. From participations 3. From shortages

and deficiencies 4. From arbitration

and judgement 5. Other

Group II Total III.Financialassets 1. Cash in Leva 2. Cash in foreign

currencies 3. Securities, bullion

and gems Group III Total

IV.Deferredexpenses Section B Total (I+II+lI+IV)

C. Receivables on subscribed shares

D. Loss Total Assets (A+B+C+D)

E. Off balance sheet assets

34,731

14

16,118 501863

402

168

570 35,062

159,004

57_56 _

225,088

54

1

33,705

2

34 1,314

35,055

111Financing 1. For investment 2. Other financing

Group III Total

Section B Total (I+II+1I)

C. Deferred Income

0

182,716

0

227,715

739

2,112

2,851 29,744

157,417

45,784' Total Liabilities

1 278,782 (A+B+C) D. Off Balance sheet

I liabilities

225,088 278,782

54

A G E N C Y F O R P R I V A T I Z A T I 0 N

29 AKSAKOV STR. SOFIA, 1000

TEL.: 86-121

UNITED !T.AG EA.EjNCY FCR INTERNATrONAL F)EVEL.nPMENT i BULGAPTA 'Sr). lit63 SOFIA BULGAR [A

17 DECEMER, 1992

COPY r::

DEVELOP.MENT ALTERNATTV17S, TNC. 7250 WOODMON1" AVENUE, SUITE 200 BETHESDA, MARYLAND 20814

DEAR 1RS

WF ARE 1GLAr. rO CONFIRM O'UIR CONSF. NT STORCO i m'r'. (PLEVEN) to BE c('ITDFRD A'. THE rIVAr:rAT'I0N

AN OF

OBJECT OF SULGARTAN

THE PROGRAMME FOP F OOD PR CE'SSING

SI.UPPORTING INDUSTRY,

FLNANCED BY U5.ATD AND EXECUTE. BY fF:,0F'LOFMCN! A[. VERNATTVFS, INC.

YOUR'; f-Al 1fLL -(

A. oz 'v EXECITIVE I)TRECTR ACFNCY FOP PRIVATIZATTON

55

Selvikonserv Enterprise Profile

Bulgaria

57

ENTERPRISE PROFILE

January 15, 1993

INVESTMENT OPPORTUNITY

Selvikonserv offers an attractive investment opportunity to control a state-of-the-art Terlet-builtjam and confiture line to serve growing premium jam and yogurt fruit markets in Europe and the Middle East with complementary production of pur6e, canned fruits, and glass-packed premium vegetables.

59

Enterprise Name: Selvikonserv

General Director: Dip. Ing. Bogomil Kassabow Telephone: 0675/45-70 Fax: 0675/45-75 Telex: 67539

Location/Address: Republika 41A 5400 - Sewliewo Bulgaria

Ownership Structure: Single-person Limited Liability Company, 100% state owned. Established in 1940. Current factory built in 1959. Only one restitution claim for less than 2% of the land by the Producer's UniQn. Most of the land was given by the state in 1959.

Business Description: A sterilized fruit and vegetable processor specialized in jam and purde.

Plant Description

Aggregate Size (m2): Storage Area: Sheds: Capacity: Property (hectares): Number of Buildings: Date of Construction:

7,519 m2 6,596 m2 (26% heated) 5,676 m2 8-9 K tons finished product 5 8 1960

Annual Sales 1991 1992 (9 months)

Volume (tons) Value (million leva)

2,140 19.8

870 9.2

Previotas Pr

EMIPLOYEES'AND PRODUCTS

Employees

Number of Employees: 175 Permanent (25 Admin) 31 Seasonal'

Turnover rate: 0 Average wage:

- Manager 7,260 levas per month - Engineers 3,138 - Other Permanent 1,875 - Other Seasonal 1,220

% of Female Employees: 68% Education Level2:

- University 15% - Specialized High School 15% - High School 20% - Vocational School 25% - Basic Education 25%

Products

Jam: Raspberry, Strawberry, Cherry and Sour Cherry, Plum, Apricot, Mixed Fruit, Peaches.(Bulgaria 500-g glass jar with press-on lid, 500- and 454-g glass jars with twist-off caps)

Marmalade: Wild Rose Hip, Mixed fruit (same as jam and 4-kg boxes)

Purte: Plum, Apricot and Apricot-Apple mix. (Bulgarian 120-liter plastic drums)

Fruit Compote': Plum, Apricot, Cherry, Strawberry, Sour Cherry, Peaches, Prunes.

(Bulgarian 820-g glass jar with press-on cap and 720-g glass jar with twist­off cap, Bulgarian 850-g metal can)

Canned Vegetables: Green Beans, Unp.eled Whole Tomatoes, Sliced and Whole Peppers,

Phefferoni peppers, Pickles, Gherkins. (Bulgarian 800-g glass jar with press­on and 680-g glass jar with twist-oft)

1 Average number of seasonal employees per day. Actual number varies depending on seasonal

demand. Seasonal employees are paid only for actual days worked, and they receive any social benefits.

2 In 1990, a policy of hiring only those who have finished high school was adopted. New employees

in turn receive a safety and operations orientation and are assigned to a trainer for a 3 month period.

3 Fruit stewed or cooked in syrup.

2

61

MARKETS ...

Sales 1991 19924 1992' Products

Volume (tons) 2,140 870 1,445 Value (million leva) 19.8 '9.2 16.5

Volume: Domestic 63% 70% 54% Canned Vegetabltz,

Marmalade Exports 37% 30% 46%

NIS6 0% 4% 0% EC7 35% 37% 25% Jam,Purde,Vegetables U.S. 0% 2 . 50% Jam Others 2% 15% 5% Pickles,Vegetables

Value: Domestic 42% 58% 41% Exports 58% 42% 59%

Working with distributors that sell product under private labels. One-year variable-price contract with Altex U.S./Bulgarian Distributor to produce 1,300 tons of jam for the United States through Jana Foods Distributors, Inc. under the Adriatic private label. Expect increase in demand for paprika and bell peppers and canned specialty vegetables such as green beans. Negotiating with Dona Distributor for pickles. Selvikonserv currently has no other open orders.

' Based on 9 months.

Full year 1992 estimated amounts based on orders for fourth quarter.

6Newly Independent States of the former Soviet Union.

Includes Germany and Holland.

' Includes Israel, Greece, and Turkey.

3

62

PRODUCTION AND PLANT DESCRIPTION

RELEVANT PRODUCTION STATISTICS

1991 1992"

Production (tons) 2,214 1,447

Payroll (million leva, w/ social security) 3.1 2.4

Raw Materials Used (tons) 2,251 2,068

Inventories/Finished Product Volume (tons) Value (million leva)

231 2.0

791 13.7

MACHINERY USED IN PRODUCTION

Type Manuracturer Book Value (million leva)

# Units Capacity (annual)

Age (years)

Fully Automated Jam Terlet 1.510 1 3,000 t" 2

Linear Fruit Canning With Autoclaves

Processing Filler/Capper

Bulgarian Russian/Italian

0 1 1,500 t 10

Linear Vegetable Canning Bulgarian 0 1 1,500 t 12

Marmalade with Condenser Bulgarian 0 1 1,500 t 14

9 months.

10 The main line was purchased with a loan for 768 thousand Dutch gilders undertaken December 1989. The Italian bottler was purchased with a loan of 243 million lira undertaken on December 31, 1990.

u 1.5 - 1.7 tons/hr.

4

ENERGY AND INDIRECT INPUTS

Owns steam plant on premises using heavy oil for fuel. Enterprise also owns 5 wells. Uses electricity from the national system.

ACCESS TO MAJOR TRANSPORTATION NETWORKS

Good access to main road. Rail is located 30 kilometers away.

TRANSPORTATION USED IN SHIPMENT OF PRODUCT

Selvikonserv does not own any trucks for product distribution. Buyers are responsible for product transportation.

5

64

:--MANAGEMIENT BIOGRAPHIES

General Manager: Mr. Bogomil Kassabow is 52 years old. He has an engineering degree with a concentration in food technology. Mr. Kassabow has spent his entire career at Selvikonserv. He has been General Manager for 19 years. Before that, he was Deputy Director for 6 years and a Foreman of the canned fruit line for 2 years.

Chief Engineer: Ms. Totka Kzaseva Boeva is 37 years old. Like Mr. Kassabow, she has an engineering degree with a concentration in food technology. She has also spent her entire career at Selvikonserv; 2 years as Chief Engineer, 2 as Chief of Quality Control, and the remaining 11 years as a Technologist for the canned fruit and vegetable line.

Chief Accountant: Ms. Venka Hristowa is 34 years old. She holds an economics degree. She has been Chief Accountant for Selvikonserv for 6 years. Before that she worked as an Accountant in another enterprise.

6

65

ANNEX

FINANCIAL STATEMENTS

SThese financial statements were provided by Selvikonserv and have not been checked by DAI accountants.

67 STATEMENT

of Income and Expenses of SelviKonserv - Sevilevo

Full Year 1991 and January 1 - September 30, 1992

Expense Items

a Ir Ordinaryexpenses1. Decrease of products

Instore, work Inprogressand deferred cost

2. Cost of materials and hired services:

a) cost of materials

b)cost of hired services 3. Personal Costa:

a)Wages and other remuneration

b)social security and other welfare allowances

4. Depreciation of tangibleand arnortIzation of Intangible non-current assets

5. Other Costs

Inc!uding Inventory Write - downs

6. Book value of sold merchandise

TotalI. II. Financial Expenses

7. Interest on loans

8. Losses on securities: a)from sale

b)from write - downs 9. Losses from currency

exchange rate fluctuations

Totals 11Ill. ExtraordinaryExpenses 10.From management

operations11. Other extraordinary expenses Total Ill

IV.Taxes 12.Profittax 13.Other taxes

Total IV Total expenses(I+II+III+IV)

V. Current peiodprofIi Grand total (I+II+lII+IV+V)

Amount (,000 lava)previous current Income Items year year

1 2 a .I. Ordinary Income

I. Net Income from sales

610 2. production

subsidies 14,503 11,991 3. State Budget Grants

4. cost of non- current 1.481 948 asset production

5. Increase of products Instore work Inprogress

2,307 2,519 and deferred Income

G. Other Income

796 882

Total I.

171 98 II. Financial Income 7. Interest from

407 174 Income 8. Income from

Participations Including dividends

1,497 428 Other 9. Income from transactions

21.772 17,040 with securities 10. Gains from currency

exchange rate fluctuations III. Extraordinary Income

3,293 2,500 11.From management

operations 12. Other extraordinary

Income -Total III

2,821 36

6,114 2,536

100

3,446 1,300 3,446 1,400

147 88 369 12 516 100

Total Income 31,847 21,076 (1+11+111

IV.Current periodloss Grand total

31,847 21,076 (I+II+II+IV)

M

Amount (0O0previous year

1

19,846

29

5,872

25.748 2,973

90

41

2,843

61

3,065 3.126

31,847

31,847

lava) current year

2

9,182

10,643

19,825 47

34

13

41

1,162 1,204

21,075

21,076

6R BALANCE SHEET

of SelviKonserv-Sevlievo 1991 Full Year and January I - 30 September, 1992

ASSETS LIABILITIES Amount (0,000 leva) Amount (0,000 leva)

SELECTIONS, Current year SELECIONS,GROUPS, pre- cor- bal- GROUPS,

ITEMS vious value rect- ance ITEMS Previous Current year ion sheet Year Year

value a 1 2 3 4 a 1 2

A. Non-current A. EquityAssets

L Tangibleassets L Capital1. Buildings, lands, 1. Authorized (initial)

forests and Capitalperennials 1,072 2,157 967 1,190 3,409 3,409

2. Plant and 2. Additional capitalequipment 352 1,046Z692 1,646

3. Other 47 391 315 76 Group I Total 3,409 3409 4. Tangible i. Reserves

non-current assets in progress 2,345 860 860 7,628 7,249

Group I Total 3,816 6,100 2,328 3t772 H1.Profit H. Intangibleassets 1. Undistributed prior

period profit1. Incorperation and 2. Current year profit

expansion costs 3 3 312 2. Products of

research and Group IIITotal development

3. Patents, licenses, - - I

Section A Total concessions, (I+1+1II)know-how, trade- 11,037 10,658marks, goodwill B. Borrowingsand software

Group II Total 3 3 0 3 L Loans_IUI.Financialassets 1. Short-term loans 3,030 3,5461. Participation 2. Long-term loans 10,939 10,1782. Other long-term 3. Debenture and

securities bonds loans3. Long-term loans Group I Total 13o969 13,724

Group III Total 0 0 0 01 Section A Total II. Pay-bles (I+11+HI) 3,819 6,103 2328 39775

B. Current assets . To suppliers 479 2,479L Inventories 2. For participation1. Materials 6,049 4__4553 3. To employees 325 4812. Work in progress 546 924 4. To the budget 506 171 3. Products, 5. for social security

merchandise and containers 9,381 16,353 123 172

4. Young and 6. Other fattening live stock 2,493 6,976

Group I Total 15,976 21,830 Group H Total 3,926 10,279

D. Receivables 6n 1. From customers 125 255 2. From participations 3. From shortages

and deficiencies 4. From arbitration

and judgement 5. Other 46 14

Group II Total 171 269 1.Financialassets 1. Cash in Leva 878 171 2. Cash in foreign 524

currencies 3. Securities, bullion

and gems Group I Total 878 695

IV.Defcrred expenses 8,088 8092 Section B Total (I+U+mI+IV) 25,113 30,886

C. Receivables on subscribed shares

D.L'ss Total Assets (A+B+C+D) 28,932 - 34,661

E. Off balance sheet assets

T.Financing 1. For investment 2. Other financing

Group M Total

Section B Total (I+11+11) 17.895 24,003

C. Deferred Income

Total Liabilities (A+B+CQ 2932 34,661

D. Off Balance sheet liabilities