OPIC , 2014BG16RFOP002 March Operational Programme Innovation and Competitiveness

Transcription

1 OPIC , 2014BG16RFOP002 March 2015 Operational Programme Innovation and Competitiveness March 2015

2 OPIC , 2014BG16RFOP002 March 2015 TABLE OF CONTENTS 1. Strategy for the operational programme's contribution to the Union strategy for smart, sustainable and inclusive growth and to the achievement of economic, social and territorial cohesion Strategy for the operational programme's contribution to the Union strategy for smart, sustainable and inclusive growth and to the achievement of economic, social and territorial cohesion Description of the programme s strategy for contributing to the delivery of the Europe 2020 strategy and to the achievement of economic, social and territorial cohesion Justification for the selection of thematic objectives and corresponding investment priorities Justification of financial allocation Proirity Axes Priority Axis 1: Technological development and Innovation Investment Priority 1.1. Technological development and innovation Performance framework of the priority axis Categories of intervention Priority Axis 2: Entrepreneurship and Capacity for growth of SMEs Investment Priority 2.1. Access to finance for supporting entrepreneurship Investment Priority 2.2: Capacity for SMEs to grow Performance framework for the implementation of the priority axis Categories of intervention Priority Axis 3: Energy and Resource Efficiency Investment Priority 3.1: Energy technologies and energy efficiency Investment Priority 3.2: Resource Efficiency Performance framework for the implementation of the priority axis Categories of intervention Priority Axis 4 Removing bottlenecks in security of gas supplies Investment priority 4.1: Improving energy efficiency and security of supply through the development of smart energy transmission systems Performance framework for the implementation of the priority axis Categories of intervention (by priority axis) Priority Axis 5 Technical Assistance Categories of intervention (by priority axis) Financial plan OPIC Integrated approach to territorial development Page. 2 of 274

3 OPIC , 2014BG16RFOP002 March Specific needs of geographical areas most affected by poverty or target groups at highest risk of discrimination or social exclusion Specific needs of geographical areas which suffer from severe and permanent natural or demographic handicaps Authorities and bodies responsible for management, control and audit and the role of the relevant partners The authorities and bodies responsible for management, control and audit Involvement of relevant partners Coordination between the funds, EAFRD, EMFF and other Union and national funding instruments, and EIB Ex-ante conditionalities Description of the actions which will be taken to implement ex-ante conditionalities, responsible authorities and timeframe of these actions Reduction of the administrative burden for the beneficiaries Horizontal principles Separate Elements Relevant partners involved in preparation of programme TABLES Table 1-1: Macroeconomic projections4f Table 1-2: Barriers for innovation development in selected sectors Table 1-3: Enterprises by size, number of employees and value added Table 1-4: Enterprises by size, sectors, number of employees and value added by sectors Table 1-5: Distribution of financial instruments for OPC Table 1-6: Overview of the justification for the selection of thematic objectives and investment priorities Table 1-7: Overview of the investment strategy of the Operational Programme Table 2-1: Programme-specific result indicators for ERDF Table 2-2: Common and programme specific result indicators for the ERDF Table 2-3: Performance framework for the implementation of Priority Axis Table 3-1. Financial plan of the Operational Programme giving the annual commitment of the European Regional Development Fund (ERDF) in the Operational Programme (Euro) per category of regions * Page. 3 of 274

4 OPIC , 2014BG16RFOP002 March 2015 Table 3-2 Financial plan of the Operational Programme, showing the amount of the total financial allocation of each fund in the Operational Programme, national funding and co-financing by priority axis for the whole programming period (EUR) Table 3-3 Breakdown of the financial plan by priority axis, fund, category of region and thematic objective for the ERDF, the ESF and the Cohesion Fund (Table 18b 19) (Art. 87 (d) (ii) of the General Regulation) (EUR) Table 7-1: Identification and contact details of the relevant competent authorities/bodies Table 9-1 Applicable ex-ante conditionalities and assessment of their fulfilment Table 9-2 Actions to fulfil applicable general ex-ante conditionalities Table 9-3 Actions to fulfil applicable thematic ex-ante conditionalities FIGURES Fig. 1. Innovative characteristics of SMEs Fig. 2. Business expenditures on R&D by economic activity (% of total business expenditure on R&D) Fig. 3. Structure of the Bulgarian export by groups of goods for Fig. 4. Final energy consumption (FEC) in Bulgaria during the period by economic sectors Fig. 5. Primary and final energy intensity Fig. 6. Protecting and restoring environment costs by sectors (as % of GDP) Fig. 7. Distance from the average values for EU Fig. 8. Resource productivity Fig. 9. Areas of support under Operational Programme Development of the Competitiveness of the Bulgarian Economy Page. 4 of 274

5 OPIC , 2014BG16RFOP002 March 2015 LIST OF ABBREVIATIONS BSMEPA CSF DAE EFRD EMFF ESIF EU ExEA FDI GDP GVA IP IP RIS 3 ICT MA MAF MEE MES MEW NSI NIF NSPSMEs OP OPDCBE OPE OPGG OPHRD OPIC OPRG OPSEIG OPTTI PA PMAF Bulgarian Small and Medium Enterprises Promotion Agency Common Strategic Framework Digital Agenda for Europe European Fund for Regional Development European Maritime and Fisheries Fund European Structural and Investment Funds European Union Executive Environment Agency Foreign Direct Investment Gross Domestic Product Gross Value Added Investment Priority Intellectual Property Innovation Strategy for Smart Specialization Information and Communication Technologies Managing Authority Ministry of Agriculture and Food Ministry of Economy and Energy Ministry of Education and Science Ministry of Environment and Water National Statistics Institute National Innovation Fund National Strategy for Promotion of SMEs Operational Programme Operational Programme Development of the Competitiveness of Bulgarian Economy Operational Programme Environment Operational Programme Good Governance Operational Programme Human Resourse Development Operational Programme Innovation and Competitiveness Operational Programme Regions in Growth Operational Programme Science and Education for Intelligent Growth Operational Programme Transport and Transport Infrastructure Priority Axis Program for Maritime Affairs and Fisheries Page 5 of 274

6 OPIC , 2014BG16RFOP002 March 2015 R&D RES RDP SEDA SME TO UMIS Research and Development Renewable Energy Sources Rural Development Programme Sustainable Energy Development Agency Small and Medium-size Enterprise Thematic Objective Unified Management Information System for the EU Structural Instruments in Bulgaria Page 6 of 274

7 OPIC , 2014BG16RFOP002 March STRATEGY FOR THE OPERATIONAL PROGRAMME'S CONTRIBUTION TO THE UNION STRATEGY FOR SMART, SUSTAINABLE AND INCLUSIVE GROWTH AND TO THE ACHIEVEMENT OF ECONOMIC, SOCIAL AND TERRITORIAL COHESION This chapter contains the description of the strategy of the Operational Programme Innovation and Competitiveness (OPIC) and the justification for the financial allocation to each thematic objective and investment priority Strategy for the operational programme's contribution to the Union strategy for smart, sustainable and inclusive growth and to the achievement of economic, social and territorial cohesion Description of the programme s strategy for contributing to the delivery of the Europe 2020 strategy and to the achievement of economic, social and territorial cohesion. STRATEGIC CONTRIBUTION OF OPIC The OPIC strategy, as a part of the implementation of the EU structural and investment funds (ESIF) in Bulgaria, according to the Partnership Agreement , is closely related to the objectives for Growth and Jobs and Bulgaria s contribution to achieving the three complementary types of growth according to the "Europe 2020": Smart growth: developing an economy based on knowledge and innovations; Sustainable growth: promoting a greener and more competitive economy and a more efficient use of resources; Inclusive growth: fostering a high-employment economy leading to social and territorial cohesion. OPIC directly engages in smart growth (under priority axes 1, 2) and sustainable growth (under priority axes 3 and 4), aiming at complementary effect in terms of inclusive growth. The support under OPIC aims at addressing the needs, overcoming the challenges and seizing the opportunities for development of Bulgarian economy, defined according to: Documents0F The National Development Programme: Bulgaria 2020 (NDP BG 2020) the leading strategic and 1 Objectives/priorities/needs Strategic Oblective 3: Increasing the competitiveness of the economy by providing a favourable business 1 COM(2013) 352 final, Council s Recommendation on the National Reform Programme of Bulgaria for 2013 and the Council s Opinion on the convergence programme of Bulgaria for the period Ref. Ares(2012) /10/2012, Position of the Commission services on the development of the Partnership Agreement and the programmes of Bulgaria for the period , etc. Page 7 of 274

8 OPIC , 2014BG16RFOP002 March 2015 Documents0F programme document which defines the objectives of the policies for socioeconomic development of the Republic of Bulgaria by 2020, as well as the national decisions for growth in the context of "Europe 2020" Strategy. The National Reform Programme (NRP) reflects on an annual basis the country's progress in implementing the national targets in the context of Union Strategy Europe 2020 and the progress on the recommendations of the Council Position of the Commission services on the development of the Partnership Agreement and the programmes of Bulgaria for the period Recommendation of the Council on the National Reform Programme of Bulgaria for 2013 also containing the Council s opinion on the Convergence programme of Bulgaria Recommendation of the Council on the National Reform Programme of Bulgaria for 2014 also containing the Council s 1 Objectives/priorities/needs environment, promoting investments, applying innovative solutions and increasing resource efficiency Priority 5 Support innovation and investment activities to increase the competitiveness of the economy Priority 7 Energy security and increasing resource efficiency National Objective 2 Investment in R&D to the amount of 1.5% of the GDP; support for promoting R&D and innovation activities of enterprises (in accordance with the flagship initiative "Innovation Union") National Objective 3 under Climate and Energy Package Reaching 16% share of renewable energy sources in the gross final energy consumption1f2 and increasing energy efficiency by 25% till 2020"(in line with the flagship initiative UResource Efficient EuropeU) Priority 2 Innovation-friendly business environment Priority 3 Modern infrastructure for growth and jobs Priority 4 Environmentally sound and resource-efficient economy Recommendation 4 by enhancing the cooperation between education, research institutes and enterprises" Recommendaion 5 "... to improve the access to finance for SMEs and start-ups." Recommendation 7.Accelerate electricity and gas interconnector projects and enhance the capacity to cope with disruption. Step up efforts to improve energy efficiency" Recommendation 6..Accelerate interconnector projects with neighbouring Member States and candidate countries, 2 The target is achieved in 2012 the share was 16.3%. Currently efforts are focused not on increasing RES but rather on the need for balancing the energy system. Page 8 of 274

9 OPIC , 2014BG16RFOP002 March 2015 Documents0F opinion on the Convergence programme of Bulgaria Partnership Agreement of the Republic of Bulgaria outlining the support under the European Structural and Investment Funds for the period Objectives/priorities/needs in particular for gas, and enhance the capacity to cope with disruptions. Strategic priority 2: Scientific research, innovation and investment for smart growth Strategic priority 3: Connectivity and green economy for sustainable growth OPIC is an essential tool for the implementation of the policies laid down in the following national strategies: The National Strategy for Promotion of Small and Medium size Enterprises , representing the vision of the Republic of Bulgaria on state support for SMEs in line with the EU policy. The need to create about new SMEs distributed in the relevant sectors of the economy, especially in the industrial and knowledge-intensive services, has been taken into account. OPIC contributes to achieving the objectives in five priority areas of the National Strategy for Promotion of SMEs entrepreneurship, access to finance, skills and innovation, environment and internationalisation. Innovation Strategy for Smart Specialisation of the Republic of Bulgaria (RIS3), which has the nature of an ex-ante continionality for OPIC and aims at ensuring an effective and coordinated management of innovation processes; strengthening the innovation system by building a modern innovation and scientific infrastructure, enhancing human capacity in response to the needs of science and industry and introduction of specific financial instruments of support; support for the digital growth and e-government. The strategy deals with the approach of determining thematic objectives (based on the so-called process of entrepreneurial discovery) with the potential to become generators of growth" for achieving significant economic impact at regional and national level. OPIC has also been developed in line with the objectives of: The Energy Strategy of the Republic Bulgaria until 2020, representing the country's vision for the sector in accordance with the current European framework and the global trends in energy technology. The key challenges are the high energy intensity of production in Bulgaria, the high dependence on imported energy resources and the need for environmentally sound development. OPIC is in line with the strategy priorities for ensuring security of energy supply, incompliance with the objectives to increase the production of renewable energy and improving the energy efficiency. The Strategy for e-governance in Bulgaria for the period and The National Programme "Digital Bulgaria 2015", which recognizes ICT as a driver of innovation andeconomic growth. The Programme sets the parameters for the development of the information society (IS) and the digital technologies in Bulgaria, leading to the implementation of the EU objectives defined in the Digital Agenda for Europe (DAE). Page 9 of 274

10 OPIC , 2014BG16RFOP002 March 2015 The EU Strategy for the Danube Region in Bulgaria, especially with respect to entrepreneurship innovation activity, increasing the competitiveness and efficiency of enterprises. The Strategy for Sustainable Tourism Development on Bulgaria which aims at promoting the competitiveness and the efficiency of the Bulgarian tourism sector through the best usage of natural and antropogenic resources in line with the market requirements and consumer expectation for sustainable tourism development. GENERAL NEEDS AND CHALLENGES IN THE IMPACT AREA OF OPIC As a small and open economy with a currency pegged to the euro, Bulgaria is heavily dependent on foreign markets and foreign investment, as been demonstrated by the effect of the global financial and economic crisis on the country s growth rate. A characteristic of the Bulgarian economy is also that presently its competitive advantages are formed on the basis of the low price of the underlying factors labour, natural resources and energy, rather than on the basis of special factors such as innovation, productivity, skilled workforce, research and technological development (which are the basis for long-term competitiveness). This determines the ambition of the OPIC for strengthening the long-term competitiveness of the Bulgarian enterprises in clear compliance with the European industrial policy: In the Eurostat projections for the period the population of Bulgaria will decrease by nearly 27% and the share of the population over 65 will reach over 32.6% 3F3, while that of children aged under 15 will shrink to 13%. According to the World Bank estimates, from 2012 to 2050 Bulgaria will have the most rapidly shrinking working age population in the world. The greatest concern is that the population between the ages of 15 and 24 is expected to fall by 41%, which will have a direct impact on the performance and structure of the education sector and the labour market, and respectively, on the overall economy. In this sense, the risks associated with the economic growth in Bulgaria, can be differentiated as external and internal. The economic activity in the EU, the trends in energy development and the volume of FDI are key external aspects of the growth forecast. Increasing the productivity, efficiency and innovation of Bulgarian enterprises are fundamental internal factors that are able to mitigate to some extent the impact of the deteriorating demographic processes. In a relatively stable external environment, growth will depend on a combination of reforms in key sectors with investments under OPIC , in support of export-oriented economy based on knowledge, innovation and sectors with high added value. Table 1-1: Macroeconomic projections 4F Indicator Level (mln. BGN) Rate of change Rate of change Rate of change Rate of change Rate of change 3 Eurostat, News Release, 80/ June 2011, Population projections Convergence Programme of the Republic of Bulgaria , updated April 2014 Page 10 of 274

11 OPIC , 2014BG16RFOP002 March Indicator Level (mln. BGN) Rate of change Rate of change Rate of change Rate of change Rate of change Real GDP (at 2012 prices) Nominal GDP Components of real GDP Private consumption Government consumption Gross fixed capital formation Change in inventories and net acquisition of assets (% of the GDP) Export of goods and services Import of goods and services Contributions to real GDP growth (p.p.) Final domestic demand Change in inventories and net acquisition of assets External balance of goods and services As specified in the Partnership Agreement , the objectives and priorities identified in the relevant strategic documents and the results from the previous programming period, OPIC will address the following key needs and challenges, which the Bulgarian economy is facing: low degree of innovativeness of Bulgarian enterprises as a result of insufficient cooperation between business, academia and universities, small in volume and inefficient investment in R&D and innovation, and lack of adequate infrastructure and environment for innovation Bulgarian SMEs are at 108 th position among 148 countries in terms of business sophistication and innovation 5. Bulgaria is the last in the EU in innovation performance and the last but one in the share of SMEs that have marketed new products or services (17% compared to 39% for the EU). The low level of innovative activity leads to a strong price competition from countries with lower production costs and a decline in the market share of Bulgarian exports in a number of leading industries (light industry, food processing, pharmaceuticals, iron and steel production, etc.). On the other hand, there is a low degree of fruitful collaboration development and introduction of innovative products with a high added value for which there is also a market demand between 5 The Global Competitiveness Report Page 11 of 274

12 OPIC , 2014BG16RFOP002 March 2015 business (especially SMEs), educational institutions and R&D organisations, which is a proven prerequisite for the achievement of economic development and sustainability. difficult access to sources of funding and low investment activity - only percent of the Bulgarian SMEs have access to public financial support including guarantees Micro, small and medium-sized enterprises have difficulties in ensuring funds for investments in tangible and intangible assets and the so-called technology transfer, and as a result of the crisis even for working capital. Businesses use primarily personal savings (62%) and bank loans to finance investments 7. A huge potential for increase has those businesses who use retained earnings and the ones that take advantage of the financial capacity of the EU funds, incl. JEREMIE. In early 2012, access to finance is very difficult for 69% of the enterprises. Securing funding for their activities depends heavily on the stage of their development. Credit is available for enterprises with longer financial history rather than younger ones only 27% of the enterprises established after 2010 have used bank loans. Constrained investment in the economy leads to limiting the opportunities for economic growth and creates barriers to the development of the innovation potential of enterprises and achieving rapid growth. On the other hand, the use of obsolete and outdated equipment seriously deteriorates the efficiency and effectiveness of production with view of production inputs raw materials, fuel, energy and labour costs per production unit, and has negative effect the competitiveness of enterprises. insufficient entrepreneurial activity and sectoral structure of the economy considerably different from the EU countries Traditionally, banks rarely provide resources for start-ups especially in the high- and medium- technology sectors, sectors of the knowledge-intensive services and of R&D, where long term assets are few and do not serve as collateral. Thus the necessity for continued financial instruments in this area is urgently needed on the basis of the experience with the JEREMIE. Nearly 6% of the SMEs (between 1200 and 1500 in total) have an annual turnover growth over 20% and constantly seek opportunities to finance the expansion of their business. They create between 35% and 40% of the added value generated by SMEs. There is obviously a need for specially modelled financial instruments to address these demands. National Strategy for Small and Medium-sized Enterprises Small Business Act shows the main disadvantage of the structure of Bulgarian companies a sectoral structure that is significantly different from the one in the EU, namely: Bulgaria EU-6 High-tech production: 1% 2% Low-tech production: 10% 8% Knowledge-intensive services: 14% 23% 6 The National Strategy for Promotion of SMEs Study of the entrepreneurship and the prospects of innovation development in SMEs , Bulgarian SMEs Promotion Agency, Sofia, 2013 Page 12 of 274

13 OPIC , 2014BG16RFOP002 March 2015 Bulgaria EU-6 Low knowledge-intensive services: 68% 51% Other sectors: 7% 16% The share of enterprises operating in the "Retail" sector is over 32% of the SMEs; for comparison, this index in the EU-27 is 17% on average while for the EU-6 it is only 13%. The following economic activities have the largest contribution to Bulgaria s GVA: production and distribution of electricity, heat and gas (about 20%), food production (about 10%), clothing (about 7%), manufacture of other non-metallic mineral products (about 6%), fabricated metal products, except machinery and equipment (6%), mining of metal ores (about 4%), manufacture of machinery and equipment for general and special purposes (about 4 %). None of them falls within the classification of hightechnology sectors, which are the main driver of "knowledge-based economy". low degree of internationalisation as per data for 2012, only 3.84% of the Bulgarian SMEs import from outside the EU, while only 1.76% export outside the EU. 95% of the SMEs are characterised with a low degree of internationalisation and the country ranks 27 th in the EU. The limited technological capacity, guarantees for sustainable quality and low innovation activity of SMEs are the factors for the poor export, which Bulgarian enterprises realize at the European and international market. In terms of the summary indicator of technological readiness 8F8 that explores the presence of the latest technology (99 th ), the level of absorption of technologies by companies (113 th ), the levels of foreign investment and technology transfer (107 th ), Bulgaria ranks 44 th among 148 countries. However, the sectors of mechanical engineering, metal products, computers, optics and electronics, automotive industry, demonstrate growth in the volume and price of exports, including labour productivity. Additionally, the production of food and clothing, medical and pharmaceutical product contributes to it as well. In practice, these are the sectors with potential for significant contribution to export growth, especially in third markets. Attracting foreign investments in targeted economic activities would contribute to better performance of Bulgaria in the ranking and to this end a proactive investment marketing for promotion of direct investments should be conducted. As a result the possibilities and services for investors in Bulgaria provided by Bulgarian institutions will become more popular. poor export structure (based primarily on export of raw materials and goods with relatively low added value) The existing data on foreign trade of Bulgaria outline the export of raw materials with the largest share: 43.3% of the total exports in 2012, followed by consumer goods % and capital goods %. Compared to the same period of 2011, the share of consumer goods and energy resources has increased while the share of raw materials has been reduced (by 3.5% less). High-tech industries achieved 6.1% of the total exports (in average 16% for the EU), which ranks third in exports per employee behind the 8 The Global Competitiveness Report Page 13 of 274

14 OPIC , 2014BG16RFOP002 March 2015 export of petroleum products and base metals. Overall, Bulgaria s export consist of products that are below the average world level of technological development. high degree of resource- and especially energy intensity of production, low degree of implementation of new technologies the SME sector contributes significantly to the formation of the profile of the Bulgarian economy as the highest resource-and-energy-intensive economy per unit of output among the economies of the EU. Bulgaria ranks first in energy intensity in EU-27, i.e. the Bulgarian economy consumes the greatest amount of energy needed to produce a unit of GDP, or by 77.34% more than the average for the EU 27. Despite the long-term trend of improving the energy efficiency of the Bulgarian economy, measured by the total energy efficiency index ODEX, in 2011 Bulgaria ranks last in energy efficiency at EU- 27 level, which is one of the factors limiting the productivity and competitiveness of enterprises in Bulgaria. The high energy intensity of the industry is due to physically outdated and obsolete technologies, limited access to new best practices, systems and models for energy and efficiency production. The period of the crisis did not allow for capital investments of strategic importance and led to a lasting trend of reducing expenditure, both public and private. Consequently a particularly serious difficulty for the SMEs proves to be the provision of free resources for investment in improving the energy and resource efficiency of their operations. According to a case study9f9, the evaluation of the Bulgarian entrepreneurs in terms of the state of technological equipment in their companies according to the EU standards shows that only in 17% of them it is modern, and for 52% it is at an acceptable level. Only 27% of the entrepreneurs say they have had the opportunity to make investments for upgrading the technology in recent years. The upgrading and improvement of technologies makes production processes more resource-efficient and more environmentally-friendly, influences the increase of energy efficiency and enhances business competitiveness by achieving lower production costs and diminishing the dependence in supply of raw materials. vulnerability to gas supply disruptions the Republic of Bulgaria is practically 100% dependent on gas imports from Russia (transited through the territories of Ukraine, Moldova and Romania) and does not have any alternative sources and routes for natural gas supply. Bulgaria was the most affected EU Member State during the gas crisis of January 2009, when supplies of Russian gas through the territory of Ukraine were interrupted for two weeks. The development of adequate infrastructure facilities and gas interconnections with neighbouring countires in particular would secure uninterruptible and diversified supplies, as well as secure the necessary conditions for the physical operation of the regional gas market in South East Europe. Building sustainable and diversified energy systems, secure energy supplies, efficient use of resources and innovative solutions are crucial to the long-term sustainable growth, job creation and quality of life. 9 Study of the entrepreneurship and the prospects of innovation development in SMEs , Bulgarian SMEs Promotion Agency, Sofia, Page 14 of 274

15 10F OPIC , 2014BG16RFOP002 March 2015 Innovation performance SPECIFIC AREAS OF IMPACT OF OPIC As the Innovation Strategy for Smart Specialisation (RIS3) has identified, Bulgaria is in the group of modest innovators whose performance is more than 50% below the average for the EU-27 10, and ranks last in innovation performance among EU-27. Innovation creates sustainable competitive advantages and as a result of promoting innovation, the Bulgarian economy will be able to move up higher in the value chain. In this regard OPIC is aimed at special impact in terms of Bulgarian innovation 1F performance in the following indicators: number of local providers 11, (local business 2F entities engaged in the process of creating innovation), contribution to the value chain 12, 3F collaboration between business and academia in the field of R&D 13, capacity for F innovation 14, nature of competitive 15 advantages15f. Fig. 1. Innovative characteristics of SMEs The innovative characteristics of Bulgarian SMEs compared with those of EU-27 show most significant distance from the EU-average in indicator collaboration. The main recommendation 16 of the Council of EU about innovations and competitiveness concerns namely partnerships between universities, research centres and industry. Promoting the exchange of ideas, technology transfer and commercialisation of research results are crucial for the ability of the Bulgarian research system to generate significant 10 According to Innovation Union Scoreboard From 61 place in to 108 place in according to the Global Competitiveness report. 12 From 86 place in to 116 place in according to the Global Competitiveness report. 13 From 92 place in to 117 place in according to the Global Competitiveness report. 14 From 80 place in to 103 place in according to the Global Competitiveness report. 15 From 100 place in to 113 place in according to the Global Competitiveness report. 16 Recommendation of the Council on the NRP 2013 and the opinion on the Convergence Programme of Bulgaria from 9th July 2013 Page 15 of 274

16 Thousand Levs OPIC , 2014BG16RFOP002 March 2015 economic impact. Bulgarian economy has not yet reached the stage of transition from 17F efficient economy to a higher level of development ( knowledge-based economy ) 17, which puts it into the position of catch-up state. OPIC will seek opportunities to accelerate the transition towards a knowledge-based economy by promoting the high-tech sector and knowledge-intensive services promotion of investment in the thematic areas of intense innovation development and innovative horizontal policies in full compliance with RIS3. In order to get closer to the EU average, Bulgaria has to make further efforts on coordinated support, aimed at increasing the efficiency and knowledge-based economy indicators (high level of development). The innovation is seen as an integral element of the competitiveness. According to an evaluation report for Bulgaria, commissioned by the EC, most of the Bulgarian companies work under the technology threshold, and their growth is based on improvements in productivity that are neither related to R&D and dissemination of knowledge, nor generation of knowledge 18F18. Even the FDI attracted so far in the economy have a limited contribution to technology transfer. To improve competitiveness, Bulgaria should emphasize both on the quality of the workforce and on capacity building to adopt and adapt the European and international knowledge and technology. This requires that the innovation policy should be oriented toward specific areas and should combine promotion of R&D-based innovation activities with those which are not directly related to R&D (such as ICT). The most serious reason for Bulgaria s lagging behind in innovation is the share of the total amount of investments in R&D and innovations in comparison with the world's leading economies and those of the other EU Member States. Fig. 2. Business expenditures on R&D by economic activity (% of total business expenditure on R&D) Agriculture, forestry and fishing (% of total BERD) Manufacturing (% of total BERD) Wholesale and retail trade; repair of motor vehicles and motorcycles (% of total BERD) Information and communication (% of total BERD) Human health and social work activities (% of total BERD) Total BERD, Thousand Lev Source, NSI, Bulgaria, In the private sector, the majority of enterprises, especially micro and small enterprises, do not have their own technologies and capabilities to develop innovations which are of significant importance for specific branch or group of branches. SMEs face number of Radoshevich, S., Strogilopulus, Strategies for smart specialization in the field of research and innovation. Assessment of Bulgaria. European Commission, 2012 Page 16 of 274

17 OPIC , 2014BG16RFOP002 March 2015 difficulties associated with the lack of qualified staff for innovation, access to applied research results and funding for such studies. In this regard, OPIC will contribute to increase the investment (public and private) in R&D and innovation, particularly in the sectors of manufacturing and services, and with the aim to achieve the national goal of 1.5% share of GDP of R&D costs. Opportunities will be sought to promote business to business partnerships and business and academic cooperation, including internationally, to increase the level of generated and transferred ideas, to achieve better exchange of specialists and extended investment activity. Table 1-2: Barriers for innovation development in selected sectors ICT Sector Mechatronics Medicine and pharmacy Knowledge intensive services Specific to the sector barriers for innovation development Inadequate system for protecting ICT s assets, such as innovative services and business process innovation Large number of small players at the base line of the value chain Undeveloped system and inappropriate infrastructure for research at initial stage and tests. Inappropriate system for protecting IP assets, such as innovative services and business process innovation Shortage of entrepreneurial skills Low level of information for funding opportunities and limited skills and capacity to access such opportunities Low level of cooperation between researchers and business. Interrelated obstacles to innovation Shortage of skilled labor Lack of cooperation between businesses, universities and research units Energy inefficiency Ineffective implementation of IPR Limited access to funding OPIC aims also at overcoming main barriers to innovations in selected areas (Table 1-2) in accordance with to RIS 3 goals.. The Innovation Strategy for Smart Specialisation addresses the need for synchronisation of efforts in the field of economic development, research and innovation, and strengthening the link between science and business. The draft version of RIS3 provides for vertical thematic areas (mechatronics and clean technologies, ICT and informatics, industry for healthy life and biotechnologies, new technologies in creative and recreative industries) and horizontal policies (ICT and resource efficiency), as well as technological niches, identified through continuous process of entrepreneurial discovery. In this context, the investments under Thematic objective 1 of OPIC support activities exclusively within the thematic areas and horizontal policies of RIS3. Page 17 of 274

18 OPIC , 2014BG16RFOP002 March 2015 In accordance with RIS3 draft version, the innovation policy of the Republic of Bulgaria in the period will be focused on: Innovation potential in the identified thematic areas (for creation and development of new technologies, leading to competitive advantages and increase of domestic products and services added value of) and Supporting innovations for resource efficiency and ICT applications in enterprises throughout the industry (for accelerated absorption of technologies) so that until 2020 Bulgaria passes from the group of "modest innovators" to the group of "moderate innovators". This will be done by: Regular analysis to identify market advantages of the country and to create high quality scientific potential, which serves the national economy and contributes to ensuring high quality life for citizens; Strengthening the innovation potential and restructuring the economy towards sectors with potential to be integrated into the EU economy with a maximum benefit both for the country and for the EU as a whole, sectors with export potential outside the EU; Encouraging private investment in research and innovation; Encouraging development and use of resource efficient, environmentally friendly and wasteless technologies that reduce pollution at the source, allowing for recycling, while reducing carbon emissions; Development of financial instruments tailored to company size and expanding access to finance for micro, small and medium-sized enterprises and innovative large companies; Development and safeguarding of human potential and talent; Development of research and innovation infrastructure (including e- infrastructure); Promoting internationalization of enterprises to enter the international market. The RIS3 approach is combined: it will support activities to establish and develop strong links between research and business; creating, attracting and retaining quality human resource; well functioning infrastructure which favours innovations. The focus will be entirely on promoting development of the thematic areas by supporting specific activities addressing the specific challenges of each thematic area identified in the process of in-depth analysis and a wide range of discussions. Horizontally innovations for resource efficiency and IT applications in enterprises throughout the industry will be supported. One of the conditions for stimulating innovation activity of enterprises according to RIS3 is the development of integral scientific-research and innovation ecosystem. The key element of building a favourable environment for innovation is the mutual coordination and complementarity between the interventions covered by ESIF, national funds and other EU funds which is explained in details in the respective part of the OP. Effective and sustainable management of innovation processes and continuous discovery of entrepreneurial potential is guaranteed by commitment at highest level and institutionalized coordination and partnership with all stakeholders (government, local Page 18 of 274

19 21F OPIC , 2014BG16RFOP002 March 2015 authorities, industry, science and NGOs). RIS3 governance is structured at several levels, described in details in Annex 4. The priorities will be set up by a Council for Smart Growth. It will carry out vertical coordination with the ministries, which form a peer network at central level. Two Councils will play a consultative role in the interaction between the peer network at central level and the peer network at regional level - The National Innovation Council (NIC) and The National Research and Innovation Council (NRIC). The peer network at regional level encompasses representatives from all regional administrations in the country. Administrative capacity on each of the vertical thematic areas will be developed in the units of the peer network at central level, through which the activities and initiatives, related to RIS3 implementation will be promptly and effectively coordinated. Knowledge on the financial instruments for RIS3 implementation will be spread out and support will be given to effective interaction with stakeholders. On the level of the regional peer network and on the level of NIC and NRIC feedback from stakeholders in the vertical thematic areas, defined in RIS3, will be received and analyzed on regular basis. That feedback will serve to measure the progress in the implementation of measures, to analyze current tendencies and to identify innovation potential and ideas. This information will be used in the process of activities prioritizing and elaborating new measures to support innovations. The enterprises face many difficulties to develop their potential and to become innovators because of limitations on intellectual property protection. The Bulgarian legislation in this field is in compliance with EU directives, but does not stimulate sufficiently local innovation activity. Although these measures have reduced the irregular acquisition of intellectual property, their implementation remains unequal, and the perception of the private sector is mostly limited to patents, obtained in international partnerships. That is why OPIC strategy includes also support for stimulation of policy developments in the area of intellectual property. Entrepreneurship The backbone of the economy are the micro, small and medium enterprises (SMEs) and despite the low performance during the economic and financial crisis, SMEs remain the main driving force of economic growth in Bulgaria, contributing to 75% of the employment (68% in the EU) and 62% of the value added (58% in the EU) 19. In % of SMEs are micro, 6.6% - small and 1.2% - medium enterprises. Although the proportion of SMEs types corresponds to that of the EU-28 in terms of value added, Bulgarian micro-enterprises are significantly behind the EU-28. The highest value-added have businesses in the Manufacturing industry, followed by the Transport, repair of motor vehicles and motorcycles industry and the Creating and disseminating information and creative products; telecommunication. 19 National Strategy for Promotion of SMEs Page 19 of 274

20 OPIC , 2014BG16RFOP002 March 2015 Table 1-3: Enterprises by size, number of employees and value added Source: NSI, Eurostat, 2012 Table 1-4: Enterprises by size, sectors, number of employees and value added by sectors Source, NSI, The sectoral structure of the Bulgarian economy differs significantly from that of the other EU countries. The share of SMEs in high-tech industries, knowledge intensive services and R&D is significantly low and therefore the stimulation of entrepreneurship and start-ups in these sectors is really important. Entrepreneurship is a key factor for the development of local economies. In principal, the more enterprises created on a certain territory, the more the chances for higher incomes and prosperity of local economy. The viability of the local economy is ensured by the existence of sufficient number of SMEs. The high number of SMEs ensures wider diversification as well as resistance of the local economy to dynamic changes. The largest numbers of enterprises per 1000 inhabitants in Bulgaria are in the regions of Sofia (capital), Varna, Burgas, Blagoevgrad, Plovdiv, and the most threatened is the local economic sustainability in the regions of Kardzhali, Targovishte, Montana, Vratsa, 20 Vidin and Silistra.22F In general the entrepreneurship in Bulgaria is dominated by micro enterprises with less than 10 employees. Stimulating the entrepreneurial activity is related to a number of factors. Despite that according to the doing business indicator Bulgaria takes sixth 20 Regional Profiles: indicators of development, Institute for Market Economics, Sofia, 2013 Page 20 of 274

21 OPIC , 2014BG16RFOP002 March 2015 place among the EU-27, the conditions associated with the funding and provision of risk for the entrepreneurs remain as a barrier to those who want to start their own business and choose entrepreneurship as an opportunity. SMEs, particularly micro and small enterprises face difficulties in access to finance as the major omissions are related to meeting the financial needs of micro-enterprises. Microfinance is one of the most popular instruments for smaller companies, start-ups and entrepreneurs who are experiencing problems accessing the banking system, which is the main source of corporate finance in the country. Consequently, the main sources of financing of micro-enterprises are mainly "funds from the owner", followed by "government grants" and "short-term loans, bank overdrafts and credit lines". It should be noted that access to basic banking products is limited to micro-enterprises that have higher turnover and appropriate assets to ensure the collateral. Providers of microfinance institutions in Bulgaria are not currently able to meet the growing demand for micro-enterprises, and their presence has gradually decreased, while borrowing costs remain high for many potential customers. There is therefore a need to promote the development of microfinance institutions. Although usually lower, the demand for equity capital in Bulgaria exists among all categories of SMEs, especially among small and medium enterprises, as observed is the need in the segment between 1 and 5 million Euro for investment. However, the supply of equity capital in the country is almost non-existent in the last few years, especially for small investments up to 5 million Euro, mainly due to the structural limitations of the financial sector and unstable business environment in the country. In the near future, only supported by JEREMIE initiatives can be considered as potential sources of equity capital. Shortage 21 of risk capital is estimated to 30.6 million / year, lack of equity for companies in a more mature stage of development - 88 million / year. Ex-ante analysis of financial instruments concluded that SMEs in the country need primarily easier access already provided into existing measures and public services, while they also need methodological, technical assistance in providing the needed externally leverage finance. The opportunities for funding in the field of entrepreneurship through financial instuments provided by OPIC will stimulate the creation of new enterprises, the successful implementation of new business ideas, and the successful and accelerated development of existing entrepreneurs, leading to economic stabilisation and growth, respectively to the creation of new jobs, partially offset by identified in the ex-ante evaluation of the implementation of financial instruments financing gap for SMEs. Innovative entrepreneurship requires strong expertise, specialised platforms and access to funding mostly through financial instruments. There are serious opportunities for improvement and extension of current funding instruments for entrepreneurship and innovation, OPIC will focus on the implementation of those ones which are working properly and will address the market needs of developing entrepreneurs to implement innovations and to support commercialisation of R&D with proven market demand. With regards to the instruments for support entrepreneurship, Bulgaria has the chance to prove itself as a regional leader. Bulgaria supports the overall European policy for SMEs development in new areas related to European and regional challenges as creative and cultural industries, products 21 Preliminary analysis of ex-ante evaluation of the financial instruments Page 21 of 274

22 23F OPIC , 2014BG16RFOP002 March 2015 and services aiming to overcome the demographic problems, aging of population, social entrepreneurship, etc. With this specific range of potential beneficiaries of ERDF funds, grant funding is a way to encourage participation with quality projects that make a significant contribution to the implementation of the national and European policies. According to the ISSS, among the sectors of creative industries most dynamically are developing information technology and film production, television production and recording and at a rate higher than the EU average in terms of the number of enterprises, value added and employment. These sectors are two of the four ones in Bulgaria, that in the years of the financial and economic crisis have a continuous growth by the indicators below. The total share of value added, just for these two sectors, and if the same pace of growth is retained, is expected to reach in % of the added value generated by all enterprises and overall of creative industries about 8-9 %. Sectoral links, according to NSI data, show that these two sectors consume products especially in production of computer and communication equipment, electronic optical products, which means that their growth will inevitably affect the growth to one of the high-tech industrial sectors in the country. Capacity for Growth The traditional manufacturing in Bulgaria is facing a strong price competition, from third parties as well as competition in terms of quality from other EU countries. Despite that, the manufacturing sectors with potential for growth and export are developed in Bulgaria, as well as such in specific areas 22, related to the European and regional challenges. On the other hand enterprises have limited resources and lower ability to take risks and considerable volumes of exports on intensively competitive markets. Factors are also: differences in the applicable law in the specific areas of economic activity; limited information about potential partners and about the characteristics of the external demand, despite the numerous traditional connections of the Bulgarian economy with other country markets. 22 Creative and cultural industries, activities related to the aging population, in accordance with paragraph (8) of the preamble to Regulation 1301/2013 Page 22 of 274

23 OPIC , 2014BG16RFOP002 March 2015 In line with the The European Competitiveness Report 2013: toward knowledge-driven re-industrialisation the restructuring of the Bulgarian economy should be based not only on the sectors of retail trade and production of raw materials but mainly on consumer and investment goods and services with a focus on high-tech sectors of industry and sectors of knowledge intensive services which will be supported by OPIC In other words the export determines the competitiveness and the growth potential of SMEs, especially for a country like Bulgaria, which is characterised by an open economy and a limited domestic market. The main trade partners of the country are among the EU-27 (60%). Assuming that European orientation means the realisation of at least 50% of the total exports of goods of the particular economic activity on the EU- 27 market, the results show that the majority of economic activities meet this criterion. The Bulgarian trade relations with countries like China, USA, Russia and CIS countries, and other countries with large market potential, became more active. Significantly high degree of European orientation is observed in the medium-high technology industries (electrical equipment, motor vehicles, trailers and semi-trailers; vehicles, but not cars) and low-tech industries (leather, clothing, furniture), where the share exceeds 75%. Exception to the general trend is reported in medicinal substances and products (from the group of high-tech industries), chemical products (medium-high technology industries), coke and refined petroleum products (medium-low technology industries), timber and tobacco products (low-tech industries), all of which have found effective market presence in third countries. Fig. 3. Structure of the Bulgarian export by groups of goods for 2011 Source: Ministry of Economy and Energy, NSI, 2012 The distribution of economic activities by groups, depending on the extent of their global technological intensity, offers a different perspective on the structure of the Bulgarian export, but as to the profile of goods export, mainly the activities are of low level of processing final products. This statement is supported by significantly higher share in the total export of medium-low-tech activities (36.0%) and low-tech activities (21.4%) compared with the high-tech (6.0%) and medium-high technology activities (19.4%). In this respect, OPIC will support economic activities with high Page 23 of 274

24 OPIC , 2014BG16RFOP002 March 2015 and medium-high-tech level of development which have the greatest potential for increasing export, improvement of export advantages of the Bulgarian enterprises on the international market and more active involvement of the Bulgarian SMEs in value chain on the international markets. A change in the export structure requires restructuring and technology modernisation of production, strengthening the application of innovative knowledge and skills and highly qualified labour, which will position the Bulgarian products in market niches of higher price range and will help to create long-term competitive advantages, and will indirectly contribute to attracting foreign direct investment. Complementary support will be also provided to institutions and organizations providing direct services for enterprises, especially to export oriented ones, for attracting investments and for international marketing of Bulgaria as tourist and investment destination. OPIC also supports the capacity of enterprises for easier access, sustainable development and presence on markets, and effective use of the benefits of growing markets. Measures which will be implemented in this area will be directed towards overcoming the limitations which the Bulgarian enterprises face in terms of competitiveness on the regional, the European and the international markets. The limitations come from high production costs and the need for optimization of production chains; the use of obsolete production technologies; lack of sufficient production capacity which can meet the volumes of market demand; lower quality of products in some sectors; insufficient information on the attitudes, expectations, and needs of the consumers; lack of objective guarantee of the quality and use of good manufacturing practices. As a result, enterprises face higher trade barriers to enter new markets or to maintain the achieved market positions. The support for development of the production capacity will contribute to the stimulation of broader enterprises participation in the value chain and the formation of competitive advantages based on specific products and processes. Complementary institutional support will help enterprises to prepare their presence on the regional, European and international markets, to attract foreign investments and successfully cooperate with foreign partners. Institutional support will be provided also for the tourism sector. Although the tourism is leading and fast growing sector in Bulgaria, with a significant contribution to the Bulgarian economy, considerable private investments in the last decade and a strong potential for further growth and positive impact on the regional development and employment, the tourism enterprises and business associations, lack sufficient capacity to offer their products independently and to promote themselves at the international market. One of the main mechanisms to support SMEs in the tourism sector is through support for establishment and functioning of the touristic regions management organizations provided in the Tourism Act. For Bulgarian SMEs ICT are very useful for improvement of integration, expansion of the range of their capacities and creating competitive advantages. SMEs are growing twice and three times faster when using ICT, therefore specific actions to promote their use will be supported. Approaches towards increasing value added on the spot, reuse of raw materials (and utilization of waste and waste products) will be supported. In this context, the flagship initiative Resource-efficient Europe is to be leading, taking into account the current stage of Bulgarian technology development. Page 24 of 274

25 2 OPIC , 2014BG16RFOP002 March 2015 The potential of clustering for the implementation of technology transfer, innovations, sharing of resources and expanding of markets, including through economies of scale remains unused, which makes it a powerful instrument for enhancing the competitiveness of the Bulgarian economy. According to the RIS3 association of enterprises in clusters allows the implementation of new production solutions and development of innovative potential, which leads to increased productivity, higher value-added production, access to markets and hence to enhance the competitiveness of businesses and expand their capacity for export. Among the main challenges that clusters face are: - been created in response to opened calls for proposals under various programs (PHARE, OP, etc.) they are less focused on solving the specific common problems of the companies involved, - lack of specified goals to be achieved in their collaboration, - weak connections between clusters and science. - inadequate promotion of Bulgarian clusters abroad, - insufficient commitment to the regional economical development - insufficient trainings, awareness and motivation of companies for the benefit of sustainable existence of clusters. As a result, the existing clusters are less flexible and adaptable to the rapidly changing environment. But there are, however, good examples of real existing clusters in the country in the field of new technologies, textile and furniture industry, marine industry and renewable energy, etc. The largest concentration of clusters, which is determined by the presence of the traditional production, is in the regions of Sofia, Ruse, Varna, Stara Zagora and Sliven, (such as the clothing industry in Ruse and Sliven, IT / electronics in Sofia and Stara Zagora) and is also result of proximity to major universities (Sofia, Varna, etc.). In accordance with the horizontal policies and thematic areas of RIS3, OPIC will support clusters (according to their needs in line with the stage of development: newly-created, developing and developed) in order to increase the degree of integration of local suppliers for maximum use of their capacity to develop competitive innovative business products and services, and active presence in the regional, national and international markets. For example, the newly created clusters will be supported primarily for "soft measures" aimed at strengthening their organizational and administrative capacity, stimulating cooperation and creating partnerships throughout the value chain, incl. adoption of good European practices. For developing and developed clusters support will be directed towards development of shared infrastructure and innovation know-how, internationalization and participation in European and international forms of cooperation in order to make the clusters the driving force for regional smart specialization in Bulgaria. Energy Efficiency The achievement of competitiveness of the economy directly depends on the management and use of the natural resources and energy production and consumption. Improving energy efficiency contributes to the implementation of all EU policies Page 25 of 274

26 OPIC , 2014BG16RFOP002 March 2015 objectives: improved competitiveness; flexibility of supply; sustainability; and shift 26F towards a low carbon economy 23. There is a close correlation between the development of energy sector and all the other economic sectors, which determines the important role which the Bulgarian energy sector plays for the economic development of the country. The Bulgarian energy sector faces challenges like significant dependence on imported resources and energy, rising energy prices and the climate change. Bulgaria is one of the poorest, most energy 27F 24 intensive and most dependent on imported energy resources, countries in Europe. Primary energy production satisfies just above 60% of the gross domestic energy consumption in the country without significant structural changes: 42% coal; 20.85% nuclear energy; 19.8% oil and oil products; 13.64% natural gas; 8.46% of energy from renewable sources. For the period , there was an increase in final energy consumption (FEC) in absolute terms from 8436 ktoe in 2000 to 9050 ktoe in Fig. 4. Final energy consumption (FEC) in Bulgaria during the period by economic sectors Source: Report on the implementation of the Second National Action Plan for Energy Efficiency in 2012., MEE (April 2013) The changes in energy consumption and energy intensity of the industrial sector are key factors affecting the changes in the overall FEC. The share of the "Industry" sector declined in 2011, compared to 2000, taking up about 30% in the FEC structure. Energy intensity is the main efficiency indicator in energy use and has a considerable impact on the competitiveness of the Bulgarian economy. Bulgaria ranks first in energy intensity compared to the EU 27. The Bulgarian economy has the highest consumption of energy per unit product of gross domestic product, or with 77.34% more than the average level within EU 27. The low energy efficiency of the industry is due to the 23 COM/2014/015 A policy framework for climate and energy in the period from 2020 to 2030" 24 National Development Programme: Bulgaria 2020, p. 240 Page 26 of 274

27 OPIC , 2014BG16RFOP002 March 2015 outdated technologies and the limited access to new good practices, systems and models for energy and efficient production. The need for replacement of large production facilities and systems is indispensable, but it lags behind because of the insufficient financial resources, and the relatively slow return of investment in such, thus the price of electricity in the country is still one of the lowest. Nevertheless, there was a trend towards reducing the energy intensity of the Bulgarian economy for the period an annual average of around 5%. The measures that are part of the energy policy of the country have a positive role in the ongoing energy efficiency policy, but a significant impact has also the structural changes in the Bulgarian economy. In 2011 annual growth of 5.4% is reported in primary energy intensity (PEI) and 2.5% in the final energy intensity (FEI). Fig. 5. Primary and final energy intensity Source: Report on the implementation of the Second National Action Plan for Energy Efficiency in 2012., MEE (April 2013) FEI of industry decreased twice for the entire period from 2000 to 2011, but in 2010 there is an increase of 10.7% compared to the previous year In 2011 the energy intensity of the sector remains unchanged, which shows no improvement. Due to the expected economic revival of the industry after the economic crisis, only by increasing the energy efficiency the growth of energy intensity in the sector could be limited. The main factor for this increase is the impact of the economic crisis, and the impact of the accompanying structural changes (about 20%, as a result of the share of the added value of industry in GDP). The largest effect for the increase in energy intensity in the sector has the manufacturing industry in which the energy intensity has increased by 4.2% compared to 2009, while decreasing by 5.5% per year in That is the reason why OPIC will concentrate resources on TO 4 in order to support the reduction of energy intensity as a priority in manufacturing industry, respectively for increase of energy efficiency in industry and commercial buildings. Page 27 of 274

28 OPIC , 2014BG16RFOP002 March 2015 For the period there is a tendency of increasing the share of energy from RES in the structure of gross final energy consumption by up to 16.3% in , which is above the EU 28 average 14,1% 26. By this in practice the national objective of 16% share of energy from RES in the gross energy end consumption by 2020 is achieved. Although the renewable energy production contributes to the reduction of emission of greenhouse gases and allows for diversification of energy sources, for which Bulgaria still has more to achieve, there are some problems related to the high growth of the electricity production from renewable sources and the low consumption in the country, resulting in the need to balance the production and consumption of electrical energy in the system,take actions for its balancing and additional costs for its management. Also the introduction of measures to promote energy from renewable sources, such as preferential prices, accompanied by an obligation to purchase the entire quantity of electricity produced from renewable sources has a high social cost as it resulted in increase of the price of electricity for consumers. Given that at present Bulgaria has exceeded the national target for increasing the share of renewable energy, and in terms of implementing the national target for energy efficiency improvement the country lags significantly, the resources of OPIC focus on support to increase energy efficiency, while the measures related to the use of renewable energywill be supported in addition to the energy efficiency measures and will be only for own needs of the enterprises While simultaneously improving energy efficiency and management mechanisms on built RES, the national target can be maintained more cheaply and still be significantly exceeded. Over achieving the target will allow the country to sell "surplus" till 2020, through the adoption of mechanisms for transfer of certificates of other EU countries. Energy intensity is directly dependent on the energy efficiency, the fuel mix and the structure of the economy as the strategy of OPIC is to address each of these elements commonly, by supporting interventions in Thematic Objective 4. According to the Partnership Agreement , promoting energy and resource efficiency is mandatory in Bulgaria for increasing the competitiveness of the Bulgarian economy. In this regard and in order to achieve the objectives of the Europe 2020, the PA plans to invest in "reducing energy inefficiency and energy intensity of production, in limiting energy dependence and increasing the share of energy for internal consumption from renewable sources in enterprises". Bulgaria's Energy Strategy 2020 is the first national strategic document which sets specific quantitative targets that must be achieved by The most important of them is the 50% reduction in the energy intensity of GDP, thereby it s expected to achieve the most rapid and cost-effective path to the security of supply and competitive industry. Gasification, according to this document, is an essential tool for the ecologization of energy consumption with the recommendation for gasification and replacement of the consumption of electricity, fuel oil and coal with natural gas consumption. Greenhouse gas emissions from all energy activities in the energy sector, industry, transport, agriculture and households, present 70% of total greenhouse gas emissions in the country. Approximately 40% of greenhouse gas emissions in Bulgaria are product of 25 Eurostat 26 Eurostat Page 28 of 274

29 ) OPIC , 2014BG16RFOP002 March 2015 the energy sector. For the period there is a tendency to reduce greenhouse gas emissions on the stage of PEC and FEC. The significant contribution of the industry and transport in the total greenhouse gas emissions (91% of CO 2 emissions in the country, while the share of households is only 5% 27 ) determines the importance of measures which aim to reduce emissions of hazardous gases from these sectors, as OPIC will therefore contribute indirectly - through the support of activities leading to energy savings as a result of which will reduce emissions of hazardous gases Resource efficiency The industry costs on protection and restoration of the environment in Bulgaria, are significantly above the average among the other member-states and in recent years these costs are increasing on annual basis by an average of about 15%. The manufacturing industry has the highest expenditures. Fig. 6. Protecting and restoring environment costs by sectors (as % of GDP) The highest costs for environmental protection and recuperation of industry are those for air and waste, and the lowest are for biodiversity, noise and vibration. At the same time in line with the indicator environmentally friendly business, the Bulgarian SMEs are substantially behind the EU average. 27 Policies and measures of energy efficiency in Bulgaria, SEDA Page 29 of 274

30 OPIC , 2014BG16RFOP002 March 2015 Fig. 7. Distance from the average values for EU 28 Source: 2013 SBA Fact sheet Bulgaria Despite the high environmental protection expenditures, the key reason for such poor performance is that Bulgaria ranks last in the EU indicator for resource productivity, which threatens the sustainability of the economy. In relation to the following criteria: innovation for the environment, share of SMEs with measures of resource efficiency, share of SMEs offering green products ' share of SMEs received public support for the introduction of measures to resource efficiency or "green products "and share of SMEs satisfied with public support, Bulgaria ranks among the last in the EU 29. The main reasons for this are rooted in: The low cost of resources and as a result - higher share of exports of raw materials; Insufficient awareness and promotion of the possible mechanisms to achieve resource efficiency and poor exchange of information between the partners in the value chain; The low level of renewal of the technological park of processing plants due to lack of financial resources and incentives; Lack of industrial symbiosis; Strong administrative burden of the various ordinations and permits relating to the protection of the environment through which are assessed and authorized new investment proposals of the enterprises related to achieving resource efficiency; 28 Source 2013 SBA Fact sheet Bulgaria 29 Source NSPSMEs Page 30 of 274

31 OPIC , 2014BG16RFOP002 March 2015 Fig. 8. Resource productivity 30 Source: Eurostat, 2014 In this regard as additional contribution to the investment of OPT, OPRD and OPE, OPIC aims to support SMEs to improve their resource efficiency as a horizontal priority and to stimulate pilot and demonstration initiatives aimed at promoting industrial symbiosis and exchange of information between the partners in the value chain (through separate investment priority), thus contributing to the turnaround of the national target set in NSPSMEs to increase the share of SMEs with measures to effectively use our resources 31. Security of gas supplies On 28 May 2014 the European Commission adopted its European Energy Security Strategy providing a comprehensive plan to strengthen Europe s security of energy supply. As a part of the immediate measures to increase EU s resilience to a major gas disruption, the European Council endorsed on 27 July 2014 the Commission s proposal to launch the so-called stress test exercise with the purpose of assessing the resilience of the European gas system to cope with a severe disruption of gas supply to the EU. Three focus groups were set up to specifically cover the regions where the impact of disruptions was likely to be most prominent, one of these groups being for South East region of the EU, including Bulgaria. One of the proposed medium term measures (by end 2015) in the Communication from the Commission to the European Parliament and the Council on the short-term resilience of the European gas system is to speed up the implementation of key Projects of Common Interest or Projects of Energy Community Interest, which include interconnections of Bulgaria with neighboring countries. The Commission will follow up such projects and also stand ready to facilitate any outstanding negotiations between parties with a view to push forward all these projects towards an expedited completion. 30 Eurostat, The goal is the share of SMEs with effective use of resources in 2020 to exceed 93%, at the time, the base value is 85%. Page 31 of 274

32 OPIC , 2014BG16RFOP002 March 2015 Projects contribute to ensuring natural gas supply from alternative sources to Bulgaria (currently totally dependent on Russia), energy security and further balance of the regional energy mix by increasing natural gas consumption, creation of jobs and support to economic recovery in the post-recession period; provision of a direct connection of the gas markets of the four Member States - Bulgaria, Romania, Greece and Hungary to the gas markets of the other South-East European ones. In order to ensure uninterruptible gas supply at affordable prices to businesses, OPIC will support Phase 2 of the project for construction of Bulgaria-Serbia gas interconnection. Moreover, forecasts show that by 2030 industry will be responsible for 43% of the total consumption of natural gas and electricity production for about 35%. At present, the share of natural gas in gross domestic energy consumption (GDEC) of the country is approximately 70% lower compared to the EU-27 and this proportion has not changed over the last decade. This makes the project for gas interconnection crucial for the development of the Bulgarian economy.with the flexibility and the decrease of the energy dependence which contribute to the reduction of the energy intensity of the enterprises, Phase 2 of the project will provide new opportunities for the development and recovery of the economy in the areas along the route, introduction of new energy technologies, etc. The availability of secure access to natural gas will contribute to the economic growth and the enterprises that switching from electricity and oil products to natural gas will realize substantial savings and reduce hazardous emissions. LESSONS LEARNED Lessons learned with regard to the effects and assessing the impact During the first programming period for Bulgaria under the OP Competitiveness (OP DCBE) the amount of 1,162,216 thousand euros has been allocated, out of which thousand (85% of the funds) financed by the EU under ERDF and thousand (15% of funds) by national co-financing. Fig. 9 presents areas for support under OPDCBE and the amount of the grants provided to the OP s beneficiaries (as of 03/31/2014) (million EUR). Page 32 of 274

33 OPIC , 2014BG16RFOP002 March 2015 Fig. 9. Areas of support under Operational Programme Development of the Competitiveness of the Bulgarian Economy Except allocated resources for the financial instruments (30%), the largest is the percentage of the funds for technology modernisation and management systems (26% of total allocation), followed by the innovation and R&D support (24%) and energy efficiency and green economy (15%). Considering the fact that still the overall impact of EU funds on the Bulgarian economy cannot be entirely measured, it can be concluded that by September 2012 there is a positive effect of OP implementation on five of the main macroeconomic indicators (GDP, employment rate, growth in private consumption and exports of goods and services), as the most positive impact is on the growth of private investment (Fig. 10) Fig. 10. Effects from the OPDCBE , SIBILA database Page 33 of 274

34 OPIC , 2014BG16RFOP002 March 2015 Evaluating the impact of the Structural and Cohesion Funds on the Bulgarian economy based on econometric model, SIBILA (in regard to OPDCBE) The main conclusion is that the effect of the financing under operational programmes cannot be measured by the amount of available funds and/or financing per piece, but by the initial stimulation of projects which the private sector undertakes, develops further and benefits multiply. Lessons learned in terms of administrative capacity and administrative burden In the beginning of the programming period , the applicants and beneficiaries faced a high degree of red type and complicated administrative procedures. The Bulgarian lack of experience in the implementation of the Structural and Cohesion Funds should be also considered. The changing legislation, complex rules and procedures and the large number of documents required upon application, often discouraged candidates, resulted in significant delays of project evaluation, which led to risk of undermining project ideas, especially in respect to projects, related to the development and/or implementation of innovations. Pre-funding, requirements for implementation by the beneficiaries of the regimes for the award for the implementation of project activities, requirements for advance guarantees, complicated reporting, delays in verification and reimbursement process also impede beneficiaries, increase their costs and often limit their free financial resources, which makes harder further implementation of the project activities. These challenges are addressed with a continuous improvement of the administrative capacity of the MA and the beneficiaries, and with the increasing attention given to the reduction of administrative burdens and bureaucracy (the so-called red tapes ), as the progress is described more detailed in the relevant section of OPIC For example, there is a legal requirement introduced for conduction of an information campaign for potential beneficiaries after the announcement of the calls for proposals and also a practice for subsequently training of beneficiaries with grant. For the programming process of OPIC the lessons learned concern: close relation between the programming process and the Programme implementation - even procedures which directly address identified needs of the business, cannot achieve high interest at application stage or effectiveness at the implementation stage, if the complication of the procedures does not allow active participation and focuses on the implementation and benefits instead; the need to define "successful" project means not only well-written or wellreported project. The administration itself should be motivated not only to minimise the risk of errors, but also to maximise the benefits for the beneficiary and to achieve the desired objectives both on project and procedure level, as well as on the level of priority axis and even programme level. Last but not least, a project has effect as long as it has attracted funding from other sources and thus ensures sustainable results. Lessons learned in terms of structuring Programme s investments Specifically in terms of innovation, the OP defines quite appropriately the economy based on knowledge and innovation as a separate priority of key importance. Page 34 of 274

35 OPIC , 2014BG16RFOP002 March 2015 After the modification of the Programme in 2012 the total amount of the Priority axis is 210,692,798, including national co-financing. The share of certifited costs till 31 st Dec 2013 is just over 10%, the main reasons for this are: late start of some of the procedures, complex procedures and restrictions at application stage. After 2012 a positive development occurs after the modification of the definition for innovation according to the Oslo Manualand opening the possibility for funding not only developed by the innovative enterprise innovation, but also developed by other entities innovations. According to a BCCI study almost half of the enterprises (45%) do not believe that in the next 3-5 years will assign the development of a new product to universities and research institutes. Only 23% of entrepreneurs say they can independently implement activities in the field of innovation. The most preferred forms of innovation activities are partnerships with other companies and universities, which is pointed by 37%. According to the survey, the two main barriers for collaboration between business and science, are the insufficient information of the business for scientific researches and the low activity of the universities. Both barriers need to be overcome and in this regard will seek synergies of interventions under TO 1 within OPIC and OPSEIG.In regard to the institutional beneficiaries, in the OP funding was set aside for them in separate axis in amount of 37,656,853. Although Priority axis 4 is the smallest one, is also characterized by an extremely slow rate of progress of the contracts implementation ( 27% certified funds to ), due to: significant difficulties in pre-financing projects due to budget constraints; pre-allocation funding under OP results in the so-called crowding out effect, which means failure to receive funds from other sources and make them dependable on the implementation and reimbursement of project costs ; difficulties in implementation and reporting of complex multiannual projects ; inequality with other beneficiaries in terms of the eligible costs for external consultancies, management team and other project specific implementation costs. Given the analysis of the experience from the period and the need for effective orientation of the programmes for , in OPIC the approach to the institutional beneficiaries has been revised and they are subject to support under the different PA, which will have the following advantages: a) it will provide more particular direction and contribution for fulfillment of the general and specific objectives of the Programme and connect them with appropriate output and product indicators ; b) it will ensure the flexibility in planning, financing and implementation of projects as well as overcoming the difficulties of management; c) it will help the institutions to open to a wider range of financing sources; d) it will provide opportunities for equal treatment to the Programme beneficiaries in terms of eligible costs, activities and etc. As regards to the financial instruments the OP DCBE is often cited as a good practice at EU level. The budget of the Priority axis after the last modification of the OP is EUR 350 million, which amounts to 30.11% of the Programme s budget. Page 35 of 274

36 OPIC , 2014BG16RFOP002 March 2015 Under JEREMIE initiative in OP Competitiveness two funds for initial funding with a total budget of EUR 21 million are supported. According to the annual progress report 2013 under JEREMIE initiative ten calls for proposals have been opened, and over 3,000 applications for funding received. Funding for 73 innovative start-ups was provided, amounting on 4,384,759 Euros. Where 6 million Euros were invested under the Programme, with subsequent private investments for 4 million Euros reported. Under JEREMIE Initiative two instruments for facilitatig bank lending guarantees, covering losses on portfolios of loans and risk sharing financing - are implemented. The two instruments are implemented to ease the conditions of bank lending. Since December 2013 there are over guaranteed loans provided under the guarantee instrument amounting on 275 million Euros, among which 173 million are for new SMEs investment. For the same period loans for approximately 170 million Euros were granted in pursuance of the low-interest rate instruments (risk sharing financing). In the process of raising private capital, in this period two more instruments for equity funding are provided VC fund and mezzanine fund. At the end of 2013 the selection of financial intermediaries for the instrument of co-financing is finalised. There is no doubt about the financial progress achieved. The table below shows the allocation of funds among the financial instruments and also the progress in absorbing (investments or loans for final beneficiaries) till Table 1-5: Distribution of financial instruments for OPC Invitation Instrument Total value of the portfolio Funds from OPC Invested funds / Loans, guarantees, million EUR Percentage of absorption JER 009/1 Venture capital fund % JER 009/2 Guarantees covering the losses on a portfolio of loans % JER 009/4 Mezzanine fund % JER 009/5 JER 009/6 Instrument for promoting entrepreneurship and providing initial funding Instrument providing risk sharing financing % % 32 Based on data from the Annual progress report of the JEREMIE initiative. The funding of the Growth fund is allocated to the risk-sharing financial instrument and also funds for co-investment, for which at the end of 2013, there are not agreed funds so they are not included in the table. Page 36 of 274

37 OPIC , 2014BG16RFOP002 March 2015 Invitation Instrument Total value of the portfolio Funds from OPC Invested funds / Loans, guarantees, million EUR Percentage of absorption Total % The Holding Fund has contracted more than 93% of the allocated funds under the OP. The absorption of 56% of the instruments, which means a significant progress, considering the delayed start of the Programme,. In terms of absorption the most successful is the guarantee instrument (91% at end of 2013). Given the fact that the instruments for risk sharing actually began operating in 2013 the rate of 42.5 % achieved also outlines good perspectives. The actual operations of the VC fund and Mezzanine funds are about to start. With respect to the Mezzanine fund, the investors expect future guarantees of the instrument after Considering the success of the financial instruments and the fact that aid under OP, aimed at this type of tools, leads to significant mobilization of private capital, under OPIC will be provided their operation and in the next programming period, taking into account the need to ensure a sufficient volume of public information about the progress of the financial instruments, the selection of financial intermediaries and the level of achievement of their objectives. The size of the portfolio and type of instruments, which will continue to be funded are determined based on the results of the use of financial instruments by OPIC under art. 37 of the (EU) Regulation No.1303 / 2013, which provides an assessment of market failure or sub-optimal investment situation in the country and the estimated level and scope of public investment needs.. FIs are planned within the different thematic objectives and priority axes, which follows the overall logic of intervention of the program and ensure the utmost achievement of the Programme s objectives and also the output and result indicators. LOGIC OF INTERVENTIONS OF OPIC The contribution of OPIC to addressing the main needs and challenges of the Bulgarian economy identified above, in consideration of the lessons learned consists of the following 6 areas of intervention: Technological development and innovation interventions under TO 1 (Investment priority (IP) Art. 5(1) (b) of ERDF Regulation; Access to finance for supporting entrepreneurship interventions under TO 3 (IP Art. 5(3) (a) of ERDF Regulation; Capacity for SMEs growth interventions under TO 3 (IP Art. 5(3) (d) of ERDF Regulation; Page 37 of 274

38 OPIC , 2014BG16RFOP002 March 2015 Energy technologies and energy efficiency interventions under TO 4 (IP Art. 5(4) (b) of ERDF Regulation; Resource efficiency interventions under TO 6 (IP Art. 5(6) (g) of ERDF Regulation; Security of gas supplies interventions under TO 7 (IP Art. 5(7) (e) of ERDF Regulation. The first area of intervention (Technological development and innovation) is committed to the achievement of smart growth in the areas of the Innovation Strategy for Smart Specialisation, particularly in regard to research and innovation. There is a need to strengthen the innovation capacity of enterprises and foster a favourable environment for innovation and research by supporting existing and effective structures/organisations. The implementation of the planned indicative actions will aim at attracting investment for innovative activities, creating and strengthening the capacity of Bulgarian enterprises for development, deployment and commercialisation of innovative products, services and business models, as well as for improving the conditions for carrying out innovation and developing the cooperation between businesses and research community. This will, in turn, promote greater integration between the parties of the knowledge triangle (Education-Research-Business) for developing competitive products/services for which there is demand in the market. The implementation of this Investment Priority will enable a rise in the value added along the value chain in relation to the Innovation Strategy for Smart Specialisation (RIS3) thematic objectives, considering the stage and dynamics of the development of the Bulgarian economy. Promoting synergistic cooperation and interaction between all players in the national innovation system and taking coordinated steps across the entire chain from the emergence of the idea, through its laboratory testing to the commercialization of the results will allow for mitigating the consequences of market failures associated with the innovation process. Regional specialisation could have a further positive contribution to the development of small and medium-sized enterprises (SMEs) according to the sector-specific initiative, the Small Business Act (SBA) within the context of RIS3. Developing links between education, research and businesses at regional level and combining local business development with creating and attracting skilled human resources will stimulate enhanced competitiveness and degree of internationalization of enterprises and support the formation of sustainable competitive advantages, which will render businesses more competitive in the domestic and international market. The actions under the first area of intervention will contribute to the implementation of the following objectives under TO 1: Contribution to the national target under Europe 2020 for increased expenditure on R&D as % of the GDP; Contribution to the following results as per Partnership Agreement: Growth of the enterprises realizing innovation activity; Support for companies that cooperate with research institutions / other entities; Support the development of technology parks and laboratories; Support for innovation clusters; Page 38 of 274

39 OPIC , 2014BG16RFOP002 March 2015 Increase R & D expenditure of enterprises. The second area of intervention (support to entrepreneurship, incl. guarantied portfolio for financial instruments) aims at achieving both smart growth and, indirectly, inclusive growth by promoting the establishment of new and sustainable enterprises to create new jobs for the Bulgarian economy. According to the National Strategy for Promotion of SME (Small Business Act), in Bulgaria there are conditions for launching and implementing entrepreneurial initiatives but there is a need for further measures to simplify the requirements for developing new ideas and facilitating the access to funding for small enterprises and start-ups. The aim of the support under this area of intervention will be to increase the entrepreneurial activity and to achieve successful implementation of new business ideas, as well as successful and accelerated development of existing entrepreneurial companies leading to economic stabilisation and growth. As part of entrepreneurship and provides targeted support for SMEs (through Grants) in emerging areas of intervention that address regional and European challenges. Contribution to the following results as per Partnership Agreement: increase in entrepreneurial activity; The third area of intervention (Capacity for SMEs growth) aims to accelerate the growth rate ( fast growth) and is expected to create opportunities for increasing the productivity of enterprises and for diversification of their product portfolios and distribution of their production in new markets through grant support in compliance with the National Strategy for Promotion of SMEs, as well through improvement of the access to finance. The competitiveness of enterprises will be strengthened, their participation in the value added chain will be enhanced, and their achievement of market stability in a rapidly changing economic and competitive market environment will be accelerated. Taking into account these circumstances and the position of the business and its organisations, the OP foresees continued investment in the period aimed at improving the production processes in enterprises and facilitating the transition to high and knowledge-based technologies for improved production, quality management and increasing opportunities for export orientation and access to international markets. There is significant potential to improve the competitiveness and productivity of enterprises through development of electronic applications and services and use of business management systems. Contribution to the following results as per Partnership Agreement: Increase of the volume of exports of goods and services generated by SMEs; Cluster support; Support for SMEs to participate in promotional activities: Support for SMEs for the introduction of certificates; Support for projects of SMEs for growth and export; Increase of the share of exports in total turnover of SMEs. The fourth area of intervention (Energy technologies and energy efficiency) will support sustainable uses of energy and improving the energy efficiency of enterprises. Compared to the other European countries Bulgaria s economy is the most energy intensive and one of the most heavily dependent on imported energy. Therefore, improving the energy efficiency of enterprises and promoting the production and use of Page 39 of 274

40 OPIC , 2014BG16RFOP002 March 2015 energy from renewable sources for their own consumption (especially in manufacturing enterprises, which have the largest contribution to the high energy intensity of the national economy) are crucial to ensure the reduction of the energy intensity of the Bulgarian economy, and thereby reduction of the distances of the national energy efficiency target. The actions under the fourth area of intervention will contribute to the implementation of the following objectives under TO 4: Contribution to the national targets under Europe 2020: Increase energy efficiency by 25% by Contribution to the following results as per Partnership Agreement: Reduction of the energy intensity of the economy; Increase of the energy savings in enteroprises; Reduction of greenhouse gas emissions. The fifth area of intervention (Resource efficiency) builds on the need to invest in achieving a resource efficient economy as a horizontal priority and complementing it with a pilot and demonstration initiatives focused on promoting industrial symbiosis and exchange of information between the partners in the value chain. The introduction of resource-efficient technologies and processes in enterprises is a prerequisite for enhancing both competitiveness and the quality of life. Given that increasing the resource effectiveness of enterprises will be addressed by the interventions under Thematic Objectives 1, 3 and 4 with the help of horizontal principle, the actions under the present area of intervention will be to a large extent complemented by the other areas of intervention. The actions under this area of intervention will contribute to the implementation of the following objectives under TO 6: Contribution to the following results as per Partnership Agreement: Reduced generation of waste and increased reuse and recycling; Improved environment and air quality, including in settlements. The sixth area of intervention (Security of gas supplies) will support the construction of adequate energy infrastructure as a prerequisite for improving the security of supply situation in Bulgaria. Developing interconnections with the energy systems of the neighbouring states will be of key significance to increasing security and flexibility of energy supply for enterprises. With a view to overcoming the main challenges related to the need for compensatory growth and addressing the areas of intervention described above, the following four priority axes with relevant investment priorities have been identified: PRIORITY 1. Technological development and innovations 1.1. Technological development and innovations ( smart growth) Thematic 33 The target share of renewable energy in the gross final energy consumption has been achieved in 2012 the share was 16.3%. At present, efforts are focused on the need to balance the electricity system rather than increase renewable energy. Page 40 of 274

41 OPIC , 2014BG16RFOP002 March 2015 Objective 1 of the Common Strategic Framework; PRIORITY 2. Entrepreneurship and Capacity for SMEs growth; 2.1. Access to finance for supporting entrepreneurship Thematic Objective 3 of the Common Strategic Framework 2.2. Capacity for SMEs to grow Thematic Objective 3 of the Common Strategic Framework; PRIORITY 3. Energy and resource efficiency 3.1. Energy technologies and energy efficiency Thematic Objective 4 of the Common Strategic Framework; 3.2. Resource efficiency Thematic Objective 6 of the Common Strategic Framework. PRIORITY 4. Removing bottlenecks in security of gas supplies 4.1. Improving energy efficiency and security of supply through the development of smart energy transmission systems - Thematic Objective 7 of the Common Strategic Framework The aim of these four priority axes is to provide a joint support for creating sustainable and long-lasting competitive advantages for Bulgarian enterprises and accelerating the transition to a knowledge-based economy, while improving the country s performance under the indicators financial market development, technological readiness, market size, business sophistication and innovation, as well as to improve security of gas supplies to enterprises. With a view to ensuring effective and efficient allocation of ERDF funding, the determination of the priority axes and investment priorities has been based on the approach of concentration of resources. Compared to the challenges faced by the national economy, ESI financial allocations seem very limited. This requires that clear and attainable objectives should be set to achieve significant impacts on the condition of enterprises. Furthermore, the funding will complement parallel national efforts in this area and it is expected that more private expenditure will be leveraged to act as a catalyst of economic development rather than an end source of funding. The lessons learned from the current programming period show the critical importance of access to funding, including for the implementation of grant projects. The application of financial engineering instruments will aim to leverage more private funding. Application of financial instruments subject to the specific characteristics of the different types of projects has been envisaged. Financial engineering instruments will aim to facilitate access to funding for enterprises and higher rate of utilization and more flexibility in the implementation of activities at the enterprise level. The main strengths of financial instruments lie in the option to reuse funding in the long run, speedy selection and flexibility of implementation for final recipients, including reduced timeframes and administrative burden of procedures and potential to leverage additional public or private investment to overcome market deficiencies in accordance with Europe 2020 and Cohesion Policy priorities. Investment directed at creating and developing effective and sustainable support and expertise systems in new and/or existing agencies, organisations and institutions through development of modern and innovative services has been identified as an Page 41 of 274

42 OPIC , 2014BG16RFOP002 March 2015 integral part of the first three priority axes that will directly contribute to enhancing the innovation and competitiveness of enterprises in the country. Investment for technical assistance has been identified as a horizontal priority axis. The goal is to ensure proper management, implementation, monitoring, evaluation, information and control for the OP and thus to guarantee not only high absorption rates for ERDF and budget funding but also good performance of OPIC strategy. Due to the scope and high number of potential beneficiaries, publicity and awareness raising measures are also essential not only in terms of meeting regulatory requirements, but also as a prerequisite for active participation in the OP, project maturity, tangible impacts and timely implementation Justification for the selection of thematic objectives and corresponding investment priorities Page 42 of 274

43 OPIC , 2014BG16RFOP002 March 2015 Table 1-6: Overview of the justification for the selection of thematic objectives and investment priorities Selected thematic objective TO 1. Strengthening research, technological development and innovation TO 3. Enhancing the competitiveness of small and medium-sized enterprises Selected investment priority Investment priority 1.1. Technological development and innovation Investment Priority 2.1. Access to finance for supporting entrepreneurship Justification for selection Council Recommendation on the National Reform Programme of Bulgaria in 2013 and containing an opinion on the Convergence program of Bulgaria for the period 2012 to 2016: Recommendation 5... to improve the access of SMEs and start-ups to finance: Recommendation 4... by strengthening cooperation between education, research institutes and enterprises. National targets National targets set out in the National Reform Programme to increase R & D investment from 0.6% of GDP in to 1.5% of GDP by 2020; In the National Development Programme: Bulgaria 2020 foresees actions for developing innovative infrastructure and ecosystem and increasing the innovative activity of Bulgarian enterprises. Identified needs: Poor cooperation of different actors in R &D; Low innovation activity and low value-added innovation Poorly developed innovation infrastructure and insufficiently attractive environment for innovation Council Recommendation on the National Reform Programme 2013 of Bulgaria as well as in other European countries and containing an opinion on the Convergence program of Bulgaria for the period 2012 to 2016: Recommendation 5. Improve the access to finance for SMEs and start-ups. In NSPSMEs a national target is the need to strengthen the entrepreneurial activity of Page. 43 of 274

44 OPIC , 2014BG16RFOP002 March 2015 Selected thematic objective Selected investment priority Investment Priority 2.2. Capacity for SMEs to grow 10% in 2012 to at least 12% by 2020 Identified needs: Justification for selection Difficult acces to sources of financing - although under the access to finance indicator Bulgaria occupies 10th place in the EU for 2012, only 16.7 percent 34 of Bulgarian SMEs have access to public financial support including guarantees; Unsatisfactory conditions, especially among young people, improved conditions, particularly those that create security environment for the realization of entrepreneurial opportunities and those related to culture and education to develop an entrepreneurial spirit. Council Recommendation on the National Reform Programme of Bulgaria in 2013 and the Council opinion on the Convergence Programme of Bulgaria Recommendation 5 "... to improve the access of SMEs and start-ups to finance" National targets: In NSPSMEs has set national targets for : Increasing the share of Bulgarian SMEs that export goods and services to other Member States. (from 3.15% in 2012 to > 7% in 2020 ) increasing the share of Bulgarian SMEs exporting outside the EU ( 1.76 % in 2012 to > 3.06% in 2020) Identified needs: Poor export structure with emphasis on goods and services with low value added; Low degree of internationalization : 95% of SMEs have a low degree of 34 NSPSMEs Page. 44 of 274

45 OPIC , 2014BG16RFOP002 March 2015 Selected thematic objective Selected investment priority Justification for selection internationalization and the country ranks 27 in the EU in Low rate of introduction of improved production technologies, optimisation of production processes and production chains, reduction of used resources and, respectively of product costs - establishing competitive advantages and sustainable market presence for Bulgarian SMEs. TO 4. Supporting the shift towards a low-carbon economy in all sectors TO 6. Protecting the environment and promoting resource efficiency Investment Priority 3.1. Energy technologies and energy efficiency Investment Priority 3.2. Resource efficiency National targets: In the National Reform Programme in the implementation of the Strategy "Europe 2020" a national target has been set to increase energy efficiency by 25% by 2020 National needs: The National Development Programme: Bulgaria 2020: activities to improve energy efficiency in enterprises have been foreseen Low energy efficiency in enterprises - Bulgarian economy consumes with 77.34% more energy per unit of GDP than the average for EU-27, which is one of the factors limiting the productivity and competitiveness of enterprises in Bulgaria. Lack of funds for investments in improving energy and resource efficiency. National targets: National Development Programme: Bulgaria 2020 and the NSPSMEs activities are provided to enhance resource efficiency in SMEs, incl. pilot and demonstration initiatives, as in NSPSMEs is set a specific target for increase of the share of SMEs with measures of resource efficiency (from 85% during 2012 to more than 93% in 2020) National needs: Bulgarian SMEs have the lowest performance resource efficiency among EU Page. 45 of 274

46 OPIC , 2014BG16RFOP002 March 2015 Selected thematic objective Selected investment priority Justification for selection Member states, which is one of the factors limiting the productivity and competitiveness of the SMEs in Bulgaria. Lack of activity, processes and products for enhancing the resources efficiency. Insufficient and inefficient investments for environmental protection. TO 7. Promoting sustainable transport and removing bottlenecks in key network infrastructures Investment Priority 4.1 Improving energy efficiency and security of supply through the development of smart energy transmission systems National targets: Electricity and Gas Interconnector Projects and Capacity to Deal with Disruptions fall under Country Specific Recommendation No 7 (2013) and Recommendation No 6 (2014) in the National Reform Programme. Energy independence on the gas market in Bulgaria continues to be among the main priorities of the country, especially with a view to the recent political and economic events triggered by the crisis in Ukraine. In order to provide cheaper gas for Bulgarian producers and improve their competitiveness, and especially in order to guarantee the energy independence and security of supplies of natural gas, extensive work is undertaken on all infrastructure projects. Special attention is being paid to the construction of the reverse gas interconnectors with the neighbouring countries (Greece, Serbia, Romania and Turkey). Diversification of gas supplies is one of the main priorities of Bulgaria's Energy Strategy to National needs: Improving security and flexibility of gas supplies. Bulgaria is an important transit hub. The strategic geographic location of the country determines the significant potential for diversification of sources and routes of gas and oil supplies. National dimensions and efforts are focused on attracting future gas pipeline routes from Russia, the Caspian region, the Middle East and North Africa to pass via Bulgaria. The construction of the planned pipelines through Page. 46 of 274

47 OPIC , 2014BG16RFOP002 March 2015 Selected thematic objective Selected investment priority Justification for selection Bulgaria will increase the security of supply and the development of the natural gas market in the region. Page. 47 of 274

48 OPIC , 2014BG16RFOP002 March Justification of financial allocation The justification for the financial allocation (Union support) to each thematic objective and, where appropriate, investment priority is in accordance with the thematic concentration requirements, taking into account the ex-ante evaluation. The allocation of financial resources from the ESI Funds to the different operational programmes that will be implemented in Bulgaria in programming period takes account of the national priorities and needs and is based on a preliminary allocation of resources by thematic objective in accordance with a specially designed national model. The allocation is underpinned by criteria that provide a basis for objective and justifiable financial allocation in line with the national priorities set out in the National Development Programme: Bulgaria 2020 and the targets of the National Reform Programme, the needs identified in the analysis of the Partnership Agreement and the Position of the Commission Services of October 2012 on funding priorities, the specific Council recommendations on the National Reform Programme, the national capacity for absorption of funding in the period The indicative allocations to the different operational programmes and thematic objectives are based on the final allocation of EU funding for the implementation of Cohesion Policy in Bulgaria. The country has been allocated a total of 3,628,667,612 euros from the ERDF, of which a total of 1 181,615,516 euros is dedicated to OPIC. In accordance with the established co-financing rate of 85% (Art. 20(3) (b) of Regulation 1303/2013), the national cofinancing of the Programme will amount to 208,520,385 euros (15% of the total budget of the Programme), in view of which the total budget will be 1, 390,135, 901 euros. In accordance with the Partnership Agreement, OPIC will support investment priorities under five thematic objectives as follows: Thematic Objective (TO) TO 1. Strengthening research, technological development and innovation Budget allocated to OPIC by thematic objective, based on the national model for financial allocation of ESI funds 21,24% TO 3. Enhancing the competitiveness of small and medium-sized enterprises 50, 17% TO 4. Supporting the shift towards a lowcarbon economy in all sectors 19.71% TO 6. Protecting the environment and promoting resource efficiency 2,64% TO 7. Promoting sustainable transport and removing bottlenecks in key network infrastructures 3.24% Page. 48 of 274

49 OPIC , 2014BG16RFOP002 March 2015 Thematic Objective (TO) Budget allocated to OPIC by thematic objective, based on the national model for financial allocation of ESI funds Technical Assistance 3,00% For each thematic objective OPIC will be complemented by other ESIfunded programmes that will address the identified national needs in observance of the principles of complementary and demarcation and will jointly meet the results of the different thematic objectives set out in the Partnership Agreement. Given the focus on clear results and the limited OP budget for each thematic objective, the adopted approach has been to concentrate resources on those programme-applicable investment priorities of Regulation 1301/2013 that best address the identified needs, attract other resources, and allow for the highest integration of measures, including from different thematic objectives, where this is justifiable and will lead to achieving synergies.. The relatively low share of the OPIC budget allocated to Thematic Objective 6 is due to several factors: The main national needs within the scope of TO 6, including resource efficiency, will be addressed (in observance of the principle of demarcation) by five operational programmes: OP Environment (with funding from the ERDF and the CF), OP Regions in Growth (with funding from the ERDF), Rural Development Programme (with funding from the EAFRD), OP Innovation and Competitiveness (with funding from the ERDF) and Programme for Maritime Affairs and Fisheries (with funding from the EMFF), where the highest share will be that of OP Environment. What is relevant to OPIC from the scope of Thematic Objective 6, is resource effectiveness of enterprises, which, at the same time, constitutes part of the horizontal principle of sustainable development. As such it will be addressed by the guidelines for project selection under other investment priorities (Technical development and innovation, Capacity for growth of SMEs, Energy efficiency). Considering the above, as well as the fact that industry costs for restoration and protection of the environment in Bulgaria are above the EU average, is the reason for the relatively low share of the OPIC budget of Thematic Objective 6. The breakdown by investment priority of the allocations to thematic objectives is as follows: Thematic Objective Investment priority under ERDF Regulation Addressed challenges Investment priority under OPIC Financial allocation to correspondi ng axis TO 1. Strengthening research, Art. 5(1) (b); Integration of measures in Innovation capacity of enterprises, incl. Technological development and innovation 100% of the funding for TO 1 or Page. 49 of 274

50 OPIC , 2014BG16RFOP002 March 2015 Thematic Objective Investment priority under ERDF Regulation Addressed challenges Investment priority under OPIC Financial allocation to correspondi ng axis technological development and innovation accordance with Art. 5(4) (f), Art. 5(6) (f) and Art. 5(6) (g) through horizontal principles capacity to develop, introduce and distribute ecoinnovation and innovation related to energy efficiency 21,24% of the funding for OPIC TO 3. Enhancing the competitiveness of SMEs Art. 5(3) (a) Entrepreneurial potential SMEs in new spheres Access to finance for supporting entrepreneurshi p Covers 16.4% of the funding for TO 3 of OPIC or 8.23% of the programme budget Art. 5(3) (d); Integration of measures in accordance with Art. 5(4) (f) and Art. 5(6) (g) horizontal principles Labour productivity, production capacity, export Capacity for SMEs to grow Covers 83.6% of the funding for TO 3 of OPIC or 41.95% of the programme budget TO 4. Supporting the shift towards a low-carbon economy in all sectors Art. 5(4) (b) energy efficiency Integration of measures Art. 5 para. 4 c) Energy efficiency of enterprises Energy technologies and energy efficiency 100% of OPIC funding for TO 4 or 19.71% of the programme budget TO 6. Protecting the environment and promoting resource Part of the measures in accordance with Art. 5(6) (g) efficient use of Efficient use of resources Resource efficiency 100% of OPIC funding for TO 6 or 2.64% of the programme Page. 50 of 274

51 OPIC , 2014BG16RFOP002 March 2015 Thematic Objective Investment priority under ERDF Regulation Addressed challenges Investment priority under OPIC efficiency resources budget Financial allocation to correspondi ng axis TO 7. Promoting sustainable transport and removing bottlenecks in key network infrastructures Art. 5(7) (e) improving energy efficiency and security of supply Vulnerability to gas supply disruptions Improving energy efficiency and security of supply through the development of smart energy transmission systems 100% of OPIC funding for TO 7 or 3.24% of the programme budget Technical Assistance 100% of OPIC funding for technical assistance or 3.00% of the programme budget Considering the national specifics, the need to focus interventions on the most pressing needs and the most important goals, while at the same time ensuring integration of measures to achieve a synergistic effect of the support, in accordance with the rules for internal coherence and complementarity, the above-listed OPIC investment priorities have been grouped in the following five (5) priority axes as follows: Priority Axis Investment Priority of OPIC Budget of Investment Priority Budget of Priority Axis Technological development and innovation Technological development and innovation (Thematic Objective 1) 21.24% of OPIC funding 21.24% of the programme budget Entrepreneurship and Capacity for growth Access to finance for supporting entrepreneurship (Thematic Objective 3) Capacity for SMEs to grow (Thematic Objective 3) 8.22 % of the programme budget 41.95% of the programme budget 50.17% of the programme budget Energy and Energy technologies % of the total % of the Page. 51 of 274

52 OPIC , 2014BG16RFOP002 March 2015 Priority Axis Investment Priority of OPIC Budget of Investment Priority Budget of Priority Axis resource efficiency and energy efficiency (Thematic Objective 4) programme funding programme budget Resource efficiency (Thematic Objective 6) 2.64% of the total programme funding Removing bottlenecks in security of gas supplies Improving energy efficiency and security of supply through the development of smart energy transmission systems 3.24% of the total programme funding 3.24% of the programme budget Technical Assistance 3.00% of the total programme funding 3.00% of the total programme funding Page. 52 of 274

53 OPIC , 2014 BG16RFOP002 September 2014 Table 1-7: Overview of the investment strategy of the Operational Programme Priority Axis Fund Union Support (EUR) Proportion of total Union support for the OP Thematic Objective Investment Priority Specific objectives corresponding to the investment priority Common and programme-specific result indicators Technological development and innovation ERDF 250,990,169 85% TO 1 Strengthening research and development, technological development and innovations Technological development and innovations Increased innovation activity of enterprises Share of innovative enterprises; Non-R&D innovation expenditure Entrepreneurship and Capacity for growth ERDF 97,217,060 85% TO 3 Enhancing the competitiveness of SMEs Access to finance for supporting entrepreneurship Improving the survival rate of SMEs including through stimulating entrepreneurship Number of enterprise survivals up to two years Entrepreneurship and Capacity for growth ERDF 495,651,181 85% TO 3 Enhancing the competitiveness of SMEs Capacity for SMEs to grow Strengthening productivity and export potential of Bulgarian SMEs Export volume of goods and services achieved bysmes Productivity of SMEs Energy and resource efficiency ERDF 232,947,006 85% TO 4 Supporting the shift towards a low carbon economy in all sectors Energy technologies and resource efficiency Reducing energy intensity of the economy Reduced energy intensity Energy and resource ERDF 31,136,631 85% TO 6 Protecting the environment and promoting resource Resource efficiency Increased share of SMEs with measures Increased share of SMEs with measures of resource efficiency Page. 53 of 274

54 OPIC , 2014 BG16RFOP002 September 2014 Priority Axis Fund Union Support (EUR) Proportion of total Union support for the OP Thematic Objective Investment Priority Specific objectives corresponding to the investment priority efficiency efficiency of resource efficiency Common and programme-specific result indicators Removing bottlenecks in security of gas supplies ERDF 38,250,000 85% TO 7. Promoting sustainable transport and removing bottlenecks in key network infrastructures Improving energy efficiency and security of supply through the development of smart energy transmission systems Better interconnectivity with neighbouring gas transmission systems N 1 standard for infrastructure Technical Assistance ERDF 35,423,468 85% TOTAL: ERDF 1,181,615,516 85% Page. 54 of 274

55 OPIC , 2014 BG16RFOP002 September PROIRITY AXES The priority axes described below are structured through an integrated approach to maximize support. Indicative activites for implementing the investment priorities are shown. These activities are indicative and the list is not exhaustive, both in terms of number and of opportunities for impact. In accordance with their procedures, the Managing Authority can add new ones or modify the activities described below in case that such a change or a new activity correspond to the thematic objectives and the investment priorities in the priority axis. Description of the Priority Axes GROWTH AND JOBS PRIORITY AXIS 3: ENERGY PRIORITY AXIS 1: TECHNOLOGICAL AND RESOURCE EFFICIENCY DEVELOPMENT AND INVESTMENT PRIORITY 3.2. Technological Development and Innovation INVESTMENT PRIORITY 1.1. INNOVATION Resource efficiency Entrepreneur ship Energy technologies and energy efficiency PRIORITY AXIS 4: REMOVING BOTTLENECKS IN SECURITY OF GAS SUPPLIES INVESTMENT PRIORITY 3.1 INVESTMENT PRIORITY 4.1 OPIC Security of gas supplies Capacity for growth of SMEs INVESTMENT PRIORITY 2.1. INVESTMENT PRIORITY 2.2. PRIORITY AXIS 2: ENTREPRENEURSHIP AND CAPACITY FOR GROWTH Page 55 of 274