The Bulgarian government has raised the share capital of VMZ Sopot by the amount of BGN 27.5mn (EUR 13.9mn). The funds for the capital hike were withdrawn from the State Consolidation Company (SCC) which is used to collect the profit from privatisation deals. SCC was set up in 2010 by the previous government to effectively circumvented the law which stated that receipts from privatisation must go to the Silver Fund (a fund set up to cover the deficit of the country's pension system in the future).

The capital increase will help the arms producer pay urgent debts, salaries and restart production, the economy ministry said in a statement. This move is part of the government's strategy to keep VMZ Sopot a state enterprise.

The outstanding debt of VMZ Sopot amounts to over BGN 170mn (EUR 87mn), BGN 60mn of which the company owes to the state. Its production is extremely ineffective, mainly because it is overstaffed and the headcount is almost impossible to be reduced due to collective bargaining agreements that limit employment policy flexibility. That was the reason why one of the potential buyers, Bulgarian company EMCO, declined to buy VMZ Sopot back in January.

After the first attempt to sell the arms producer failed in January, Bulgaria's privatisation agency launched a second privatisation procedure in May. While the latest tender is not officially cancelled yet, it seems that the new government does not intend to sell the company.

We note that although SCC's acquisition of VMZ Sopot's newly issued share capital does not officially qualify as state help, in reality it is exactly that - an allocation of state funds to an inefficient enterprise that needs serious restructuring. It is likely that the EC will investigate the deal and might fine Bulgaria if it considers the transaction an impediment to competition.