Bulgaria: Progress of sorts

Author: | Published: 1 Jun 2011
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

The financial crisis which started in the US and Western Europe in early 2008 and came to Bulgaria in the second half of 2009 continues to bear on the local economy. While signs of an economic recovery are slowly emerging, the market for project finance is yet to benefit in a meaningful way.

The Bulgarian project finance market was quite small and unsophisticated even during the boom years of 2000 to 2009. Since the onset of the financial crisis the market practically disappeared with the notable exception of renewable energy (see below) and to a limited degree commercial real estate (primarily shopping centres and office buildings).

The major change, therefore, is that there are very few holders of assets, resources or rights who are seeking to raise capital on a project finance basis to develop, construct and operate those assets. The banks have tightened their credit requirements and save for multilaterals – principally the European Bank for Reconsstruction and Development (EBRD) – are reluctant to take long-term credit risk except in projects which benefit from state or strong municipal backing.

This presents an issue in itself as, despite the huge potential for tapping the project finance market in upgrading existing and constructing new energy, infrastructure and other public assets, the government has no policy on project finance to speak of, let alone actively using its potential. In the two years during which the government has been in power, not a single project finance transaction has been initiated in respect of a public asset.

Changes to structuring and documentation

Given the state of the project finance market, it is difficult to identify meaningful changes to structuring and documentation. Yet, one change relating to both has been clear for some time now. With respect to state- or municipality-backed projects it has become almost impossible for financiers to obtain state or municipal guarantees or comfort letters of any kind (from legally enforceable to mere providing merely political support) or direct agreements. Very few exceptions to this exist, invariably on projects financed by multilaterals (such as the EBRD or the Japan Bank for International Cooperation (JBIC)).

While such guarantees, comfort letters or direct agreements were not a common feature of the Bulgarian project financings of public assets in the last decade (they were viewed as exotic), a few significant project financings which closed in the mid-2000s, most notably the Maritza East I and Maritza East III power plant financings, contained all or some of them.

A testament to this dramatic change is that the government has publicly stated that it would not provide any sort of guarantees or enforceable comfort letters in respect of the 2,000MW Belene nuclear power project, the country's largest public project of all time. It remains to be seen whether this would indeed be the case given typical lender requirements to finance nuclear plants generally and in Bulgaria in particular.

Another marked change, which is especially relevant to power projects, is the practical disappearance of long-term offtake/service contracts which energy asset holders could make with the respective public utilities (NEK as public provider or ESO as electricity system operator). While this is to a certain extent justified due to potential competition law reasons, (principally the market foreclosure effect), the prohibition on a generating asset entering into a long-term offtake/service contract with a public utility is certainly not blanket. Not least, the Energy Act specifically allows NEK to purchase electricity from grid connected generators "pursuant to contracts for the long-term offtake of capacity and electrical energy" (Article 93a).

The above changes matter a great deal as even though quite often project finance is raised by privately-owned asset holders, offtake/service and associated arrangements are invariably linked to state, quasi-state or other public agencies or authorities.

Increased role of multilaterals

A notable post-financial crisis development of project finance in Bulgaria has been the increased participation of multilaterals. It is difficult to think of a major project financing in which a development bank (typically EBRD, European Investment Bank (EIB) and to a lesser degree International Finance Corporation (IFC) and JBIC) not leading the syndication effort. This is no doubt due to the fact that commercial lenders have significantly less appetite for project finance generally than before the crisis.

However, some of the government's actions (most notably the lack of clear policy, as well as of statutory and other government support for project financing of major infrastructure assets, the adoption of an exceptionally restrictive new renewable law) have made commercial lenders and equity investors think twice about political risk.

The increased involvement of development banks in project financings does not mean that the projects being financed have more relaxed bankability requirements. Rather, the accumulated knowledge and expertise of the multilaterals of the legal and regulatory regimes, as well as business practices in the countries in which they operate, makes the multilaterals more accommodating of the needs of their project finance borrowers and equity investors. The result is that in these difficult times such borrowers and investors are increasingly willing to take advantage of financing their projects from development banks.

It is also noteworthy that multilateral-led syndicates increasingly include large Bulgarian banks (which are for the part subsidiaries of Western European banks such as UniCredit, Raiffeisenbank, Société Générale and a few others).

Market potential

Despite the government's reluctance to tap the project finance market to develop, construct and operate various public assets, Bulgaria offers immense potential for this kind of activity. Nearly every piece of public infrastructure (roads, bridges, tunnels, civil and military airports, sea ports, schools, hospitals, prisons, all sorts of power facilities, and electricity and gas transmission networks) needs to a different degree, and in most cases substantial, upgrading and/or expansion. Very often assets that the public clearly needs are non-existent. For example, Bulgaria does not have a single gas-fired power plant which (given its agility and flexibility) is particularly suitable as a peak-time energy and hot reserve provider.

In view of the above, the following sectors should be particularly conducive to project financing in the near to mid-term future:


The government is extremely active in upgrading the existing road infrastructure and extending or building new motorways. That said, the government is not looking to do such upgrade or construction on a tolling basis. This is potentially due to the fact that the previous governments granted a few years ago a concession over the Trakiya motorway (Bulgaria's largest) on a non-competitive basis and after the project became controversial cancelled the concession. The fact that substantial EU funds are being used to build and upgrade roads also plays a role.

Last but not least, a toll road project is one of the most complex project financings to put in place and takes substantial time. The same is also true of toll-based bridges and tunnels. To date Bulgaria does not have a single road, motorway, bridge or tunnel (or any section of those) which has been constructed and is being operated on a tolling basis. Still, the regulatory framework for the construction and project financing of toll roads is fairly good, principally based on the Concessions Act and the Roads Act.

The potential for the Trakiya motorway (or sections of it) to be given to a private operator is still there as large sections of it are in dire need of repair and it is largely underdeveloped in terms of commercial facilities which are typical for this type of motorways. Hemus motorway (Bulgaria's second largest) is also a clear favourite for being constructed on a tolling basis as only a small part of it has been finished . The same is also true of the Maritza and Struma motorways (the former leading to Istanbul and latter to Thessaloniki) of which most of the sections remain unfinished or construction has not even started.


The government has publicly announced that it intends to grant a concession over Sofia Airport, Bulgaria's busiest civil airport. It remains to be seen whether they will actually follow through. If they do, the government can rely on a good precedent for granting an airport concession given the successful concessions granted to a joint venture majority-owned by Fraport over Varna and Burgas airports in late 2006.

The government is also seeking the granting of a concession over at least one smaller civil airport, most likely in the city of Rousse. A number of private investors are seeking to project finance small airports to service mostly private or low-cost traffic, though it is difficult to identify concrete projects.


No significant power projects are currently seriously envisaged to be built by the state, any municipality or other public investors. The major exception is Belene NPP (in which NEK is to hold a majority stake, at least initially) but the government's commitment to see the project through remains elusive and very difficult to gauge. Another possible exception is the 80MW Gorna Arda hydro-based power plant (majority owned by Austria's EVN with NEK holding a minority stake) but the project is at a very early stage and its remote location and lack of government support through a long-term offtake or other appropriate arrangement makes it unlikely to succeed in attracting bank project financing.

The picture is a bit more optimistic on the private investor side with at least two investors seeking to project finance gas-fired power plants. The main obstacle to raising the financing is the lack of a statutory support scheme for such type of plants and the reluctance of both NEK and ESO to enter into long-term offtake/service contracts with the plant owners on bankable terms. Absent such contracts, such plants (as well as any other plants) would need to rely on the unregulated (free) market for power or so called additional services which, given the generally low electricity prices in Bulgaria, creates substantial uncertainty as to the project's cashflow.

Renewable energy (principally wind and solar PV), which shot to a near-bubble high between 2007 and mid-2011, will most likely continue to be the most active project finance market in the near future, though two big (and interrelated) problems have recently emerged. The main problem is the country's new Energy from Renewable Sources Act (effective May 3 2011) (ERSA) and the much stricter requirements (much higher equity participation, stronger credit enhancements) of resident and non-resident banks to extend credit for the construction and operation of renewable projects.

Finally, the government would most likely opt for the full transfer of the high-voltage electricity transmission network from NEK to ESO in order to comply with the third energy package requirements. Upon transfer ESO would be fully responsible for the maintenance, management, upgrading and extension of the network. This should generally present an opportunity for the project financing if not of the entire upgrade of the network, then possibly of important sections of it.

Municipal services and infrastructure

Bulgarian creditworthy municipalities (which are not many and largely include a few big cities, as well as several places in which there are concentrations of large industrial facilities such as Sevlievo, Peshtera and a few others) have been using the local bank loan and bond markets. Some municipalities, with Sofia leading the way, have also managed to raise project finance for municipal companies which provide public services – typically transport, parking, water and wastewater services.

The predominant financiers of such projects are EBRD, EIB, as well as a number of large local banks with established municipal financing expertise. Given the growing needs for municipal services in the more affluent corners of the country and the central government's shrinking financial support for the local authorities, the market for financing of municipal services on a project finance basis has reasonably good prospects.

Large infrastructure projects

Bulgaria participates (through several wholly-owned companies) in three international pipeline projects, namely the Burgas-Alexandroupolis Oil Pipeline Project, the Nabucco Cross-Border Gas Pipeline Project and the South Stream Gas Pipeline Project. All of these are international projects in which the Bulgarian participation is a minority one except for the South Stream Project in which Bulgarian Energy Holding and Gazprom hold equal stakes.

The development, financing and construction of all projects is handled by the respective project companies in accordance with best international practices with the Bulgarian government or companies having little managerial input in the process.

As is normal, the financing for the construction of these projects would be a mix of multilateral, commercial bank and ECA debt, and none of the financing mandates has been awarded.

Legislative and regulatory developments

The solely important recent law concerning the project finance market is the Energy from Renewable Sources Act (ERSA). It was a long time coming. However, it is not surprising that when Parliament hastily adopted it in late April 2011 in a form substantially different from the bill that it had approved a few months earlier, there were not many investors in renewable energy cheering.

While the law has some good features it is generally viewed by the investor community as stifling renewable energy investment in Bulgaria, particularly in wind and solar PV projects.

ERSA's principal features, from a project finance perspective, are set out below:

Grid interconnection

An investor who plans to construct an renewable energy facility or to expand an existing such facility must submit to the operator of the respective electricity grid an application for connection as per the locations chosen by the investor and duly approved by the energy regulator. Upon filing of an application, the investor must deposit a guarantee for participation in the procedure at the amount of BGN5,000 ($3,650) for each megawatt of the design capacity specified in the application. If the operator of the respective electricity grid finds a particular application duly made, it must carry out a study and issue an opinion on the conditions for, and manner of connection to, the grid.

The following types of facilities are excluded from this procedure: (i) plants with total installed capacity of up to 30kW designed for installation over roof and facade constructions of buildings as well as in the appurtenant regulated land plots; (ii) plants with total installed capacity up to 200kW designed for installation over roof and facade constructions of buildings for industrial and warehouse activities, as well as in the appurtenant regulated land plots; and (iii) plants with installed electric capacity up to 1MW for production of electricity from biomass, designed for construction in urbanised territories, agriculture units or industrial zones.

The above mechanism for connection to the electricity grid is also not applicable to renewable energy facilities, if upon filing of the application for grid connection the investor declares that it will not make use of the applicable feed-in tariff. As a matter of principle the costs for construction of the equipment necessary for connection of the energy plant to the respective grid to the point of ownership of the electric equipment are borne by the investor. Reciprocally, the costs for construction of the connection infrastructure from the point of ownership of the electric equipment to the point of connection, as well as the costs related to reconstruction and refurbishment of the electricity grid, are borne by the owner of the respective grid.

Upon the entry into a preliminary agreement for connection to the grid, the investor must pay to the transmission company or the respective electricity distribution company an advance payment in the amount of BGN50,000 for each megawatt of installed capacity of the future renewable energy facility in case the total installed capacity exceeds 5MW, or BGN25,000 for each megawatt of installed capacity of the future renewable energy facility in case the total installed capacity is up to (and including) 5MW.

This advance payment forms a part of the price for connection to the respective electricity grid. The term of the preliminary grid connection agreement cannot be longer than one year as before expiry of this term the investor must file a written application for conclusion of a connection agreement. The grid connection agreement is entered into for a term which cannot exceed the deadline for commissioning of the renewable energy facility and the associated grid connection equipment, and in the case of one-phase commissioning such term cannot exceed two years.

The electricity generated from a renewable energy facility is purchased by the public supplier (being NEK EAD) or respectively by the end suppliers (affiliates of the three electricity distribution companies operating in of Bulgaria) at a preferential price (feed-in tariff). Importantly, the feed-in tariff which is applicable to a particular project is the preferential tariff effective at the date of completion of the construction works for the renewable energy facility.

Completion of said works is evidenced by a construction protocol known as Act 15. This is one of the critical flaws of the law as it means that, for any bigger project, a renewable project investor and its lenders would most likely not know the preferential tariff applicable to the plant until the plant is nearly complete. This is because unless construction works are complete by June 30 of the relevant year, the preferential tariff may be decreased in an unpredictable manner effective July 1 of that year.

Formation of preferential feed-in tariff

Each year, not later than June 30, the energy regulator determines the feed-in tariffs for renewable energy facility except for the energy generated from hydroelectric power stations with installed capacity above 10MW. The tariffs are determined in accordance with the applicable enabling legislation, taking into account the particular renewable source, the type of technologies, the installed capacity of the plant, the place and mode of installation of the equipment, as well as investment costs, return rate, structure of the capital and the investment, output capacity of the installation as per the type of technology and resources used, costs related to achieving a higher degree of environmental protection, costs for raw materials for energy generation, costs for transportation fuel, labour costs, and other operating costs.

This is another critical flaw of the law in that while all of the above factors are reasonable and normally should be taken into account, the protection on tariff stability which the old law provided (tying the tariff to the average prices at which end-suppliers were selling electricity to customers plus an increment set by the regulator which could not go down year-on-year by more than 5%) is completely gone in ERSA.

It does not generally help that while the energy regulator is independent, as required by applicable EU and domestic law, recently it has been openly doing the government's bidding which follows the maxim "Keep all energy prices as low as possible for as long as possible".

Off-take agreements

The electricity generated from renewable sources is purchased by NEK or the end-suppliers, respectively, on the basis of long-term power purchase agreements. The off-take periods of such agreements depending on the type of the renewable source are as follows: (i) 20 years for electricity generated from geothermal and solar energy, as well as for electricity generated from biomass; (ii) 12 years for electricity generated from wind energy; and (iii) 15 years for electricity generated from hydroelectric power stations with installed capacity up to 10MW, as well as for electricity generated from other renewable sources.

The feed-in tariff for renewable energy facility is fixed for the entire term of the off-take agreement save for off-take agreements for biomass generated electricity in which case the energy regulator has authority to review and change the applicable feed-in tariff on an annual basis. After expiry of said term the preferential tariff is no longer applied.

About the author

Vassil Hadjov is a partner with more than 12 years of experience as a banking and finance, and energy and infrastructure lawyer. He has advised leading international financial institutions (Citigroup, Deutsche Bank, BNP Paribas, Sumitomo Mitsui Banking Corporation, VTB Capital, Barclays Bank, HSBC, EBRD, IFC, JBIC) on a wide variety of banking and finance transactions, including bilateral and syndicated loan facilities, receivables financing, export finance and structured finance.

He has also advised major energy and infrastructure companies (AES Corporation, GDF Suez/Electrabel, EDF Energies Nouvelles, Mitsubishi Corporation, Group Five, Fraport AG) on one of the country’s biggest project financings and concessions. Before joining Spasov & Bratanov he worked as a legal counsel in EBRD’s banking and corporate recovery teams and as an associate lawyer in Freshfields Bruckhaus Deringer’s global project finance group in London. Before that he spent two years as an associate with a major Sofia law firm.

Vassil Hadjov holds master degrees in law from Sofia and New York Universities and a diploma in Japanese culture studies from Soka University in Tokyo. He is a member of the Sofia and New York bar associations.

Vassil Hadjov was recognised as "very proactive" and "excellent all-round business lawyer with a keen commercial sense for banking and project finance that is able to get right to the issues and solve things fast and reliably" by IFLR1000: The Guide to the World’s Leading Financial Law Firms’s 2006 edition. He was also named as a leading banking and finance lawyer in Bulgaria and recognised as "trustworthy and hugely knowledgeable" by Chambers Europe 2011.

Vassil Hadjov is fluent in English and Russian and has a strong command of French.
Contact information

Vassil Hadjov
Spasov & Bratanov Lawyers' Partnership

Slavyanska Office Centre, floors 2/3
29A Slavyanska Street
Sofia 1000

t: +359 2 980 18 08
f: +359 2 980 25 10
e: office@sbn-law.com
w: www.sbn-law.com