European Funds Don’t Help the Small Businesses Mind the horns!

The EU cohesion policy aims to transfer funds from the stronger EU countries to the economically weaker. This policy has existed for nearly 25 years. Bulgaria became a beneficiary of EU funds by its inclusion in the programming period 2007 to 2013. To understand the significant change that the absorption of EU funds brings in the economy, look at the chart (1) below. It aims to show the growth of contracts concluded by all contracting authorities before and during the programming period under the Public Tenders Act.

(Number of concluded contracts by month from September 2006 to March 2014)

The figures below are for concluded contracts by type of contract for 2012 and 2013.

Chart 2. Value and percentage ratio of finalized contracts in 2012 by type – blue – construction; red – supplies; green – services.

Chart 3. Value and percentage ratio of finalized contracts in 2013 by type – blue – construction; red – supplies; green – services

The visualization clearly shows that most money is spent for construction. There is even a noticeable increase in money spent as percentage of the supplies and services, as well as in the value of the spent funds. We will now discuss in detail construction, which is the most important subject of public procurement. Assuming provisionally that small business is “powered” through public procurement in construction in the amount of up to 200 000 levs; the medium enterprises – from 200 000 levs to 2.15 million levs on average, and more than 2.15 million levs go for the big business, then the distribution of funds for all expenses in 2012 and 2013 looks like this :

Chart 4 Total value of concluded contracts in construction through public tenders for 2012 in levs and its spending in percentage ratio depending on the value of the contract – blue – over 2.15 million levs; red – from 200 000 levs to 2.15 million levs; green – from 0 to 200 000 levs

Chart 5 Total value of concluded contracts in construction through public tenders for 2013 in levs and its spending in percentage ratio depending on the value of the contract – blue – over 2.15 million levs; red – from 200 000 levs to 2.15 million levs; green – from 0 to 200 000 levs

Miserable 2% for the small business:

The conclusion is more than clear – small business utilized only 2% of the cost of money for construction. There is no tendency to increase or decrease funding spent through contracts for up to 200 000 levs. This negative trend is complemented by the huge share of funds spent through contracts for over 2.15 million levs – a segment where it is impossible for a small company to fulfill the application requirements. In 2012, their share was 78% and only in the course of a year, there is a noticeable trend of increasing large contracts. In 2013, they formed 83% of all spending money in construction. We can conclude that this trend is at the expense of contracts from 200 000 levs to 2.15 million levs as they have decreased by 5%.

We place public orders for supplies and deliveries second. Here, we assume another division provided by the Public Procurement Agency – namely contracts for up to 50 000 levs; contracts from 50 000 to 180 000 levs; contracts for more than 180 000 levs .If we assume again that these contracts are awarded respectively to small, medium and large business, the conclusions are the following:

The small business gets a minimum share of the money for supplies and deliveries. In 2012, it was 4% and it was 3% for 2013. There is a downward trend in the share of small business.

In the supply and deliveries segment, the big business gets again the lion’s share – in 2012 – 84% and 87% in 2013. The trend is alarming in view of the increase in funds absorbed by large companies at the expense of the small and medium business.

The medium business keeps a very small share of 12% in 2012 and 10% in 2013.

Chart 6 Total value of concluded contracts in supplies and deliveries through public tenders for 2012 in levs and its spending in percentage ratio depending on the value of the contract – blue – over 180 000 levs; red – from 50 000 levs to 180 000 levs; green – from 0 to 50 000 levs

Chart 7 Total value of concluded contracts in supplies and deliveries through public tenders for 2013 in levs and its spending in percentage ratio depending on the value of the contract – blue – over 180 000 levs; red – from 50 000 levs to 180 000 levs; green – from 0 to 50 000 levs

We put contracts, concluded under the Public Procurement Act, for services in the third place. This situation is identical to the one in construction and supplies. There is a huge share of the big business (88%) and a minimal share of the small business (5%). There is no trend of deterioration or improvement of the situation from 2012 to 2013.

Chart 8 Total value of concluded contracts in services through public tenders for 2012 in levs and its spending in percentage ratio depending on the value of the contract – blue – over 110 000 levs; red – from 50 000 levs to 110 000 levs; green – from 0 to 50 000 levs

Chart 9 Total value of concluded contracts in services through public tenders for 2013 in levs and its spending in percentage ratio depending on the value of the contract – blue – over 110 000 levs; red – from 50 000 levs to 110 000 levs; green – from 0 to 50 000 levs

As seen from the Chart 8, after the start of the absorption of EU funds, there was a huge increase in contracts under the Public Procurement Act i.e. a large percentage of public procurement is related to the implementation of EU projects. It is clear that the small and medium enterprises are nearly unengaged in the absorption of EU funds. There is a trend of consolidation of activities in one public procurement bid in order for them to go into one company. This leads, first, to higher requirements for applicants, which in turn excludes a small business as possible candidate. Secondly, it leads to concentration of resources in large companies that are close to the major political players.

Immediate conclusions:

The focus of absorption of EU funds is not on their effects, but rather on someone’s personal interest in their “correct” distribution.
The trend towards consolidation of money flow (bribe flow) from small and medium-sized to large companies should be eradicated during the next programming period. Otherwise, small businesses will be pushed again to the sidelines of the implementation of EU projects.
Simply on its own, EU money cannot make a country rich. Proper management is the foundation of positive effects for the economy.
European money without a good institutional environment and rule of law is simply absorbed but not utilized.
The effectiveness of European projects cannot and should not replace efforts to improve the business environment in a country.

(The author is a lawyer and consultant in the field of project management)

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