1. INTERNATIONAL CONFERENCE “Policy and Models for R&D Management in Support of Defence Industrial Transformation” June 28-29, 2007 Sofia, Bulgaria ECONOMIC TRANSITION AND DEFENCE INDUSTRIAL TRANSFORMATION: BULGARIAN CASE Issues and Policies Prof. T. Ivanov

2. OUTLINE INTRODUCTION INHERITED AND TRANSITIONAL ECONOMIC AND SOCIAL PROBLEMS ARMY DEMAND ECONOMIC CONSTRAINS SOCIAL FRAME DEFENCE INDUSTRIAL CHALLENGE DRIVING ECONOMIC POLICIES R&D CAPABILITY AND POLITICS CONCLUSION

3. INTRODUCTION Transitional countries (including Bulgaria) must consider new dimensions of their defence industrial policies into new global market and security environment The right policy have to be based on mixture from relevant coalitional force capabilities, high productive competitiveness, and stable social guaranties for involved personnel National protective activism could help to solve the existing problems, but focus on the high competitiveness, based on the growing innovativeness of the companies, and labor competence will play the key role for adaptation of the defence industries The capacity of the countries to declare and manage of modern defence R&D innovative policy is a precondition for competitiveness and security of the country New Concept for national DIB is a needed and appropriate part of the New Strategy for security and Defence of the country.

4. INHERITED AND TRANSITIONAL ECONOMIC AND SOCIAL PROBLEMS Deep specialization, reaching about 80-90 % of the output of the production Product portfolio based on soviet products, with politically gifted, but no law regulated licenses Sharply narrowing of the old markets Considerable for the country defence industrial overcapacity, and large diversification of the products Limited capacity for national own research, and well developed competence for technological development of the production Growth of the social problems, related to the low wages, reduction of the professional personnel; blockade of education, training, and development

5. ARMY DEMAND, FORCE GOALS AND ACQUISITION Army has one third of projected capabilities for participation into expedition operations Movement to professional Army for 2008 11 priority armament modernization projects started Only 5 of the projects in execution (loans for around 700-800 mil Euro)‏ No clear vision for the next projects

6. ECONOMIC CONSTRAINS State budget for 2007 is 20 bill Euro, what is 41 % from the GDP Defence budget (DB) is 600 mil Euro, or 2.2 % from the GDP, and 5.5 % from National budget Investment part of DB from 150 mil Euro is only 1/20 from the resources, needed for 11 priority projects Yearly export of traditional products tends to 100 mil Euro (1/6 of DB)‏ Increase of the production will depend of the external markets, not from Army demand

7. SOCIAL FRAME Middle salary of the personnel 1/10 from the European level Country has lost 1.3 mil from his near 9 mil population in 1989 (15 % of the present population)‏ Blockage of the education of the new specialists, and mass release of low professional workers Minorities unemployment reaches 90 % and migration from small villages to the big cities High social price (for the 2007 4.3 % from GDP, and 11 % from the state budget)

8. DEFENCE INDUSTRIAL CHALLENGE Scenario A - to increase the competitiveness of the companies and this way transformation and stabilization of the DIB Scenario B – to loose competitiveness, withdrawal from defence market, conversion for civilian products, and shrinking the DIB Scenario C – loosing their actives like many in transitional period, which is not obligatory means losses for the national economy, but usual change of owners, and possible narrowing of national industrial sector

9. INTERNAL DRIVING ECONOMIC INTERESTS AND POLICIES Three main group of interest – army, national defence industry, and trading (importing and exporting) companies The policy model includes transition from “governing elite preferences” to the “lobbing of group interests” ISDRM system is not guaranteed the rational strategic resource allocation, because of discrepancy between system’s and political decisions.

10. R&D CAPABILITY AND TRANSITIONAL POLITICS National and defence R&D policy, depends from the political-economic transitional model, and transfer and cooperation between national and global DIB Defence R&D expenditures have been reduced to 0.25 % from the defence budget Technological and innovative personnel is around 1% of the available 6 170 direct involved people in DIB

11. Conclusion Acceptance of parliamentarian approval and direct control of the arms modernization plan Development of implemented ISDRM and Defence acquisition system Development of New allies' integrated Concept and Model for management of defence R&D Development of New Concept for DIB, based on PPP, and Public Financial Initiatives, and building up of the effective democratic administration of the defence industrial policy Enforcing the international cooperation of the companies