1. Business process outsourcing & system support activities in Bulgaria: Opportunities for US companies, comparative analytical study Draft for the Silicon Valley Conference September 2004 1

2. Summary
This presentation examines Bulgaria, Romania, Hungary, and Poland as alternative locations for software outsourcing, large scale support services operations and business process outsourcing
The analysis focuses on three key factor groups impacting performance:
Business environment stability and predictability
Productivity based on labor force cost and skill base
Infrastructure and partner support
The analysis uses latest data from the following official sources: Eurostat, IMF, World Bank, European Central Bank, EBRD, KPMG. Data used from individual government sources is indicated
The presentation also provides more specific info about Bulgaria and a review of the Bulgarian ICT sector

3. Methodology of the country comparative overview
Stability and predictability
Productivity & cost
Infrastructure and partner support
GDP growth sustainability
GDP growth drivers
Purchasing power
Corporate taxation
Currency risk impact
Inflation impact
Qualifications
Wages
Employer contributions
Hidden costs
Broadband
Power supply
Logistics
Local support
The “hard factor” methodology linked to direct costs is expanded by two more sets of factual evidence available upon request
“Soft factors” including confidence of investors expressed in volume of foreign direct investments and country investment rating
Ad-hoc analysis of political stability, governments track record and EU progress

4. 1. GDP growth sustainability
GDP growth E
Average GDP growth
Source: EUROSTAT
Bulgaria leads in terms of average sustained GDP growth
Significance for a US investor's business: GDP growth is best indicator of near term visibility

5. 3. Purchasing power versus cost to employer
Growth of GDP per capita at purchasing power standards (1999 – 2004E)
* As of Oct for Hungary
Source: EUROSTAT
Bulgarian and Romanian population grew their purchasing power standards significantly more and faster than Poland over the past 5 years due to different economic models
At 2-3 times lower salary levels, Bulgarians and Romanians can now acquire more goods and services in their home economies than Polish
a US investor's employees in Bulgaria and Romania will continue to enjoy better life standards at lower nominal salaries over the medium run (5-10 years)

6. 2. GDP growth drivers
average real contribution to GDP growth
Source: EUROSTAT, EIU
Budget deficit
Consolidated government debt as % of GDP
Investment and consumption fueled growth in Bulgaria at factor of two times the other countries
Poland, Hungary & Romania maintained high budget deficits to sustain growth while Bulgaria was at near 0%
Bulgaria grew while reducing debt by over 50% while the others increased debt further
For a US investor, growth drivers and growth funding are key to assessing economic stability in the future

7. 2004 and stated 2005 corporate tax rates
4. Corporate taxation
2004 and stated 2005 corporate tax rates
Source: KPMG, Government budgetary programs
Bulgaria has a lower corporate tax rate than Romania
Nominal tax levels are equally important with the government’s ability to keep stated tax policy
For a US investor, lower tax levels and tax policy predictability have direct impact on profitability

8. Currencies index fluctuation to Euro (May 2003-April 2004)
5. Currency risk impact
Currencies index fluctuation to Euro (May 2003-April 2004)
Source: European Central Bank
In the 12-month period May 2003-April 2004, the average monthly exchange rate of the PLN, HUF and ROL changed respectively by 4.9%, 5.4% and 4.6% on average
The lev is pegged to the Euro and is not subject to currency risk
a US investor would have no cost in terms of currency hedging or risks in Bulgaria

9. 6. Inflation exposure Inflation rates (2000 – 2003)
Source: Eurostat
Inflation is significant source of risk exposure to real growth and profit expectations
Bulgarian, Polish and Hungarian economies have curbed inflation; inflation level remained high in Romania
a US investor would have significant exposure to lower stability and visibility in Romania

10. 7. Education
Net enrollment rates
in secondary education
Number of higher education
students per 100,000 inhabitants
High education - students /
teaching staff ratio
Source: Global Education Digest - UNESCO, National Statistics Institute (academic year 2001/2002)
Source: Global Education Digest, European Center for Higher Education (UNESCO), Academic year 2002/2003
Source: OECD statistics (academic year 2001/2002)
Levels of secondary and higher education in the three countries is comparable (no data for Romania)
Bulgaria has a larger proportion of students enrolled in the key 3 fields

11. 2003 eoy monthly gross salary comparison (€)
8. Salary levels
2003 eoy monthly gross salary comparison (€)
Average
ICT
ICT
% social security
Company
salary (€)
premium
adjusted
paid by the employer
cost
Hungary
535 (Oct.03)
40%
749
29%
966
Poland
488
40%
683
22.72%
838
Romania
177
40%
248
38% to 45%
342 to 360
Bulgaria
147
50%
221
32.2%
292
Source: Eurostat (for average salary levels), KPMG (for social security contributions)
Bulgaria and Romania have salary levels at 27% to 33% compared to Hungary
ICT industry employees are likely to earn up to 40% above average country salaries; 50% estimated for Bulgaria

12. 9. Hidden costs
2003 Corruption Index scores from 10 to 1
(with country ranking in parenthesis)
Source: EBRD, BEEP survey
Source: Transparency International
“Time tax” paid in dealing with public administration by company managers is approximately 10% in Poland and Romania, 7% in Hungary and 4% in Bulgaria
Hungary has the lowest level of corruption from the four countries followed by Bulgaria

13. Key infrastructure parameters ITU Digital Access Index 2002*
Power outages 2003
Flight time
to Munich
Budapest
0.63 No
1.15 h
Warsaw
0.59
1.35 h
Sofia
0.53
2.0 h
Bucharest
0.48
1.54 h
*Source: ITU survey December 2003
Budapest, Warsaw and Sofia are classified in the upper access group; Bucharest is in the medium class group
No major power outages occurred in the four cities in 2003

14. Support to ICT companies in Bulgaria by IBA in 2004
11. Local support
Support to ICT companies in Bulgaria by IBA in 2004
Investor (country)
Status pre IBA support
Project
Current status
American Standard (USA)
Manufacturing site with 4,000 employees
Expansion of European IT support
25 jobs to be created in June
Business Park Sofia (Germany) – City Call (Belgium)
seats contact center
Expansion to ,000 seats
Office construction in progress
SAP Labs (Germany)
180 software development team
Developer and tester recruitment
Recruitment in progress
TaxBack (Ireland)
Service hub supporting 18 offices worldwide
Expansion of office space and people
Negotiations with schools
IBA is presently assisting foreign investors involved in expansions including over 2,000 technology and support jobs
Site development support, staff recruitment and training are included in the assistance programs of the Bulgarian Government as part of its ICT priority strategy

15. IBA’s project pipeline in ICT services

16. Bulgaria: country specific information
Foreign direct investment development
Technical and language education
Operational cost

17. Record FDI in 2003, continuing into 2004
FDI stock by country H 2004
Total USD 6.8 bn
FDI inflow in Bulgaria F, USD m
901
Jun‘04
* Privatization of Bulgarian Telecommunications Company was finalized in June 2004
FDI stock by sector H 2004
Total USD 6.8 bn
1st half FDI, 2000 – 2004, USD m
Source: BNB, Invest Bulgaria Agency

18. UNIVERSITY LANGUAGE BA/MA EDUCATION GENERAL SECONDARY EDUCATION
Highly educated, English-speaking workforce
350 secondary technical schools
15% of the population has university degree
Technical degrees obtained at 17 universities
110 CISCO academies in the country – in 2003 Bulgaria won 2 of 6 world CISCO annual awards: “Best project” and “Best student”
Year 2003 university enrolment:
7,500 students in computer sciences
3,600 in communication technologies
800 in maths
4,200 in electrical engineering, electronics and automation
Academic enrollment, 2003/04
UNIVERSITY LANGUAGE BA/MA EDUCATION
English: 1,369 students
German: 639 students
French: 482 students
Spanish: 236 students
Italian: 124 students
GENERAL SECONDARY EDUCATION
English: 429,000 students
German: 119,000 students
French: 71,000 students
Spanish: 16,000 students
Italian: 4,500 students

19. Bulgaria - most competitive cost base in Europe
Property
cost
/per sq. m/
Tax
Office rent, class A, Sofia
Office purchase price, Sofia centre
Industrial property rent prices, large cities
Industrial construction works cost
Office building
€ 9 to 17
€ 700 to 1,400
€ 3 to 5 € €
Corporate tax rate 19.5% (15% in 2005)
0% in areas of high unemployment for manufacturing activities
VAT exemption for equipment imports for investments over € 5 million
Personal income tax 29% highest bracket (monthly income over € 300)
0% capital gains tax

20. Bulgaria: competitive ICT industry
Stable legal framework
Rapidly developing infrastructure
High value added software industry
Contact centers booming

21. ICT industry: Legal and regulatory framework
IPR protection in place
Law on copyright and related rights (1993- last amnd. 2003)
Patent Act (amnd. 2003)
A new law on telecommunications provides for the full liberalization of the telecom market by 2005
Law on Electronic Document and Electronic Signature ( ) – secure conduct of e-commerce
Law on the Protection of Personal Data (2002) – human rights protection in line with the EU norms
Classified Information Safeguarding Act ( )
Convention on Cyber Crime of the Council of Europe ratified

22. Broadband infrastructure availability (BTC)
Bulgarian digital telecommunications network (2003)

23. Alternative fiber optic networks
Bulgargaz:
650 km developed (mainly in Southern Bulgaria)
Connectivity with Turkey and Romania
Cooperation agreement signed with the cable operator Cabletel
National Electric Company:
200 km developed (out of 1,000 km planned)
Sofia and Plovdiv already connected
Cabletel:
Currently working on the Southern part of a 1,800 km national optic line ring that is expected to be ready by 2005
Mobiltel developing the Northern part of the ring – to be ready in March 2005; Siemens is the main contractor for this project
Connectivity to Greece will be in place in July; Romania, Turkey, Serbia and Macedonia will follow

24. Source: Bulgarian Telecommunications Company
€ 1.2 billion buoyant telecom market
Source: Bulgarian Telecommunications Company
Fixed lines cover 85% of the households; 80% digitalization by 2008
Full telecom liberalization by Jan 2005
Telecom privatization complete in 2004; investor committed a full network upgrade

25. Bulgarian software industry review
Bulgaria is the leader in the field of outsourcing among the countries in East Europe ← Latest research of CIO and Meta Group
Bulgarian software companies develop the expert specification together with the client, provide smart solutions and meet the deadlines within the initial budget
Bulgarian software developers have a wide expertise in:
Key markets of the Bulgarian software industry – the US, Canada, Germany, France, UK, the Netherlands, Austria, Italy, Japan, China
ESI Centre in Bulgaria since 2003
Sophisticated information systems
Industry knowledge and solutions
Network security services & solutions
E-business and wireless applications
Geographic Information Systems
Rapid Prototyping Systems
Gaming solutions
Web design
Complex B2B solutions
Embedded software
CAD/CAM
Multimedia

26. Software development: skill availability & cost efficiency
20,000 IT professionals
3,000 IT university graduates per year
3rd worldwide IT certified professionals per capita
1st in Tokyo math Olympics (2003)
2 gold medals in US math Olympics (2003)
€ 515 average monthly salary
in the IT sector
Annual salaries for software developers:
CEO €18K - €24K
Project leader €15 - €18K
Senior developer - €12- €15K
Developer €4K- €8K

27. Case study: SAP Labs in Bulgaria
100% SAP-owned
180 people in Sofia
J2EE application server platform
Fastest growing subsidiary of SAP worldwide
SEE Investor of the Year 2004
Plans for expansion in 2004

28. Case study: Tumbleweed – US leading provider of secure Internet messaging software in Bulgaria
Tumbleweed Communications Bulgaria:
Since 2002: leading provider of enterprise solutions in the areas of anti-spam, anti-virus, filtering, and encryption
more than 600 enterprise customers
Currently employs approximately 60 people
After selling operations in Bangalore, India announced expansion of existing business operations in Sofia, Bulgaria by 50% by the end of 2004
Will employ 90 people by the end of 2004
“Over the past several years, we have proven that Bulgaria is a competitive, productive place to do business with a lot of talented and well-trained people. As we look to expand here in Sofia, we plan to continue hiring the best and the brightest people that Bulgaria has to offer.”
Eric Dumas, Director of Tumbleweed Communications Bulgaria 14

29. Bulgaria: a highly competitive location for contact center business
11 contact centers in Bulgaria – mainly marketing and technical support
Main foreign companies having a contact center in Bulgaria: American Standard, Hewlett Packard, City Call - Belgium, Tax Back - Ireland
Countries serviced from Bulgaria - USA, Canada, Australia, New Zealand, Japan, Ireland, UK, the Netherlands, Belgium, Germany, Italy
Languages to be actively supported from Bulgaria – English, German, French, Spanish, Italian, Russian
Average company cost:
EUR for contact agents
EUR for supervisors

30. Case study: City Call, Belgium → IMRO, Bulgaria
Initial investment of € 500,000
Survey made Sep - Nov 2002
Bulgarian company set in Dec 2002
Operation stared in April 2003
300 phone operators employed June 2003
Office in Business Park Sofia; 2 MB line provided by BTC Net
Contact center activities – marketing + help desk
Languages used: French and Dutch - customers from Belgium & France are served
Salary ratio 6:1 compared to company similar facility in Belgium
Established local partnerships with the French language programs of the major Sofia universities and colleges
€ 5 million will be invested & 2,000 jobs will be created in

31. Case study: Taxback - Irish tax refund service support center
Taxback: call and service center in Varna, Bulgaria
2001: 150 employees
2003: 265 employees
24 Hour Tax Advice in 6 different languages
Bulgarian Taxback people developing/training new business operations of Taxback in Russia and Spain
Taxback globally:
18 offices worldwide
Income tax refunds for all nationalities that have worked in the USA, Canada, the UK, Australia, New Zealand, Germany, Ireland, the Netherlands and Japan to customers all over the world
120,000 tax returns per annum
Skilled labor force (oriented towards excellence of service) was the key factor for Taxback to establish the Bulgarian office. 14

32. Why Bulgaria: conclusions
Best investment credibility in the region
Success story quotes
National commitment for encouraging foreign investment

33. Bulgaria Fitch Rating Track
Sound economic fundamentals make Bulgaria preferred site to other SEE :
A constantly growing investment credibility:
LONDON, June 24 (Reuters): “Bulgaria had its foreign currency credit rating raised to investment grade on Thursday by Standard & Poor's, opening the door for more investors to buy the country's bonds
"The upgrade reflects the country's bright economic prospects and prudent fiscal policies. Bulgaria's improved creditworthiness is supported by its high growth potential, prudent fiscal policies, and European integration”, Moritz Kraemer S&P credit analyst
Bulgaria Fitch Rating Track
Aug 2004 Fitch also gave an investment-grade upgrading Bulgaria's long-term foreign currency rating to BBB- with a positive outlook

34. Bulgaria delivers cutting edge solutions in ICT from a proprietary platform
The testimonials:
“Forget India – Let’s Go to Bulgaria”, Business Week, March 2004:
“It was access to nearby talent that convinced SAP to set up its Bulgarian outpost…” BW, March
“Scattered around the capital are hundreds of small software companies doing projects for an impressive list of the biggest customers in the world, including Boeing, BMW, General Motors, Siemens, Nortel…” BW, March
“Other giants, such as SAP and Computer Sciences, have local labs in Sofia…”
“There is an exceptionally high level of talent in Eastern Europe”, Kasper Rorsted, Managing Director for EMEA at Hewlett-Packard Co.
“The combination of existing and proven local expertise, the excellent academic facilities and the strength of the Bulgarian economy, made Sofia an ideal choice for further investment in our global mixed-signal engineering capabilities.” Nelly Pergoot, Managing Director, AMI Semiconductor Bulgaria

35. Administrative business-friendly environment
Wide public support for the National strategy for encourage-ment of investment created by Ministry of Economy
Ministry of Economy responsible for investment policy making
InvestBulgaria Agency, part of the Ministry of Economy, assists investors set up business in Bulgaria through:
Informational services and individual administrative services
Consulting
Marketing research
Sector analyses
Business contacts
Linkages with the central and local government institutions facilitating investment projects implementation
Investment marketing

36. New Law on investment promotion – Aug 2004
Equal treatment of Bulgarian and foreign investors
Preferential treatment for manufacturing or service providing investment projects, creating employment – implementation required within 3 years
3 classes investments according to project value:
1st class - over € 50 mln
2nd class – between € mln
3rd class - between € mln
All classes benefit from speeded-up administrative service as well as information service
Individual administrative services for 2nd and 1st class investors
Infrastructure support to the borders of the investment project site together with facilitated land acquisition for 1st class investors