Another chip off the EBRD block – Kronospan expansion in Belarus
Bankwatch Mail | 2 December 2014
In October this year, the European Bank for Reconstruction and Development (EBRD) approved an up to EUR 50 million loan to a Belarusian subsidiary of the Austrian company Kronospan for the expansion of a particleboard facility at Smorgon in the Grodno region of Belarus.
Belarus will provide a guaranteed return on investment for both Kronospan and the EBRD. With the country’s rich wood resources, generous state tax incentives, weak legal environment, toothless trade unions, cheap labour and a generally stifled civil society, the EBRD and its client are not likely to run into the same environmental and legal difficulties experienced by Kronospan in other eastern European countries.
This article is from Issue 61 of our quarterly newsletter Bankwatch Mail
Kronospan and the EBRD, the bank seeking to promote and develop transition in the former eastern bloc countries, go back a long way.
Deemed by the EBRD to be a reliable client promoting good business practice, Kronospan’s credit history with the EBRD extends over 20 years. Since 1994, the EBRD has poured nearly EUR 500 million into at least 13 Kronospan-led operations in central Europe, financing new or expanded manufacturing plants that produce oriented strand board, particleboard, medium density fiberboard, chipboard and other products. The company has also picked up financial support from other international development banks in the same period.
Facts worth knowing about Kronospan, Belarus and the EBRD
This latest EBRD loan for Kronospan in Belarus is not the first of its kind either. The current loan comes as an addition to a EUR 90 million loan to the company for the construction of a particleboard plant in Smorgon. The EBRD has also provided Kronospan with EUR 65 million for a new oriented strand board plant in Mogilev.
Just like some other multinational corporations such as ArcelorMittal (another beneficiary of multiple EBRD loans), Kronospan’s strategy appears to be to enter eastern Europe’s emerging markets, buy up old facilities, upgrade them and introduce new lines with a view to boosting production. Such investments may bring some good news for local workforces but they can also pose a burden for public budgets, distort competition and involve costs for the environment and the health of local inhabitants.
A Kronospan facility that opened in the Czech Republic in 2004 – without EBRD support – created 52 new jobs and “several hundred” indirectly related jobs in maintenance, forestry and transportation. The Czech state balanced these employment benefits with EUR 31 million in corporation tax exemptions, amounting to 48 percent of the overall investment costs, thus increasing Kronospan’s market power and creating barriers for existing competitors.
Health and environmental costs too need to be factored in, as Kronospan projects tend to involve the construction of greenfield production plants that have become notorious in certain locations for pumping out emissions of formaldehyde, airborne dust and other pollutants.
Nevertheless, the EBRD has consistently ranked Kronospan investments in central and eastern Europe as carrying limited environmental and social risks. On the ground experience with Kronospan projects, however, has been noticeably different.
Kronospan’s Czech plant has ranked for years as the second highest polluter of carcinogenic substances in the country. The ‘oriented strand board’ plant and its sister chipboard operation have been repeatedly fined by the Czech Environmental Inspectorate, among other things for inadequate emissions mitigation measures and waste management. In Romania, Kronospan has been repeatedly fined for exceeding formaldehyde emissions limits.
Further experience of Kronospan operations in Slovakia, Romania and Russia reveals how shortcomings in project due diligence, coupled with the fast-tracking of permits and weak enforcement of environmental rules by state authorities, have stirred hefty public opposition which in turn has obstructed the operations’ development. And EBRD involvement in some of these investments has failed to bring tangible improvements.
In 2003, the EBRD announced it was considering a EUR 14 million loan to Kronospan that would enable production expansion and the construction of a new medium density fiberboard plant in the town of Presov, Slovakia.
However, a local citizens’ initiative objected that the estimates of noise levels and emissions coming from the plant had not been presented in the project documentation and questioned the quality of the air pollution monitoring system. The group also pointed out the fast-track joint zoning and construction permit process that hampered thorough due diligence. This subsequently became the subject of a complaint to the Regional and – eventually – the Supreme Court. In 2007, the Supreme Court ruled that the construction permit was obtained in a flawed process.
The EBRD’s attitude and approach towards this Slovak project – following approval of the loan from its board of directors in December 2003 until the 2007 Supreme Court verdict decision – is shrouded in mystery. It is unclear if the bank ever signed a contract with the company. The project summary document is no longer available on the EBRD website and the investment is not listed in the cumulative overview of EBRD projects, indicating that it was likely cancelled.
Following a disagreement with the Slovak government over the scope of state subsidies in exchange for 550 new jobs, Kronospan pulled out of Presov and transferred most of its production to southern Poland.
In 2004, the EBRD approved a loan of approximately EUR 135 million loan to Kronospan for the expansion of particleboard production in the Romanian town of Sebes. Three years later, the company built a new production line without having either conducted an environmental impact assessment or received environmental and construction permits. Romanian authorities eventually issued permits for the already constructed plant. Outraged local citizens, involved in the Pollution-free Sebes! Campaign, brought the case to the attention of the European Commission. In 2010 the Commission ruled that Romania failed to take legal measures against the illegal plant and that it breached European directives.
A similar pattern of Kronospan contempt for safeguards and lax oversight from the EBRD has also been seen in the case of a particleboard production plant in the town of Ufa, in the Russian Republic of Bashkortostan.
In 2013, Kronospan received a EUR 45 million credit for the construction of the plant without having either conducted an environmental impact assessment (including related consultations with the public) or obtained environmental and construction permits. A public campaign kicked off, raising issues such as legal violations, the high risks of water pollution and the use of obsolete equipment brought from a run-down facility in England. The General Prosecutor’s examination of the case concluded that the state government had breached the law by prioritising the project and providing it with tax incentives.
Following an inspection by the Russian authorities, the construction was put on hold. As of summer 2014, the project promoter had met the legal requirements. However the construction is continuing in the face of ongoing opposition from locals.
According to Nina Lesikhina, toxics campaigner with Greenpeace Russia,
“By financing new Kronospan operations, the EBRD has been turning a blind eye to the legacy of the company’s procedural and environmental violations across central and eastern Europe. If the EBRD fails to ensure that the client addresses the legal requirements, it shares responsibility for the related environmental problems and social conflicts in the region.”
Amid these unresolved Russian woes, the EBRD has now approved a further new loan to Kronospan Belarus. In light of this, questions mount as to whether the EBRD has taken any steps to avoid past failings – such as more effective assessment of clients and adequate environmental screening of projects – or whether it is intent on writing more blank cheques for Kronospan indefinitely.
Worth knowing – Kronospan, Belarus and the EBRD
Kronospan has attained a strong market position in Belarus. It ranks among the top three foreign investors in the country over the past three years, and it has benefited from tax exemptions and state incentives for some of its operations. The EBRD-financed Kronospan oriented strand board plant is located in the Mogilev Free Economic Zone. Kronospan may thus have benefited from a substantial tax reduction package totalling up to 40 percent in tax savings. The socio-economic benefits of the country’s free economic zones are questionable – isolated from the rest of the economy, they tend to be areas featuring low-waged labour, inward linkages and environmental neglect.
In 2012, the EBRD considered a EUR 40 million loan to Kronospan in Belarus to finance the construction of a plant at Smorgon. The project was cancelled and the company chose to dismantle the production lines and entire industrial buildings of a similar plant in Germany and transfer them to Belarus.
The precise scale of lending that Kronospan has been receiving for its wood-based panelboard operations from international financial institutions such as the EBRD is blurred by the non-transparent ownership structure of the company. The Belarus project beneficiary is owned by Kronospan Holdings East Limited that is registered in Cyprus. Kronospan Holdings acts as the parent company for the eastern European operations of the Kronospan Group based in Austria. It is unclear if there is any relationship between the parent corporation and other ‘Krono’ companies that have received international development funding.
The EBRD is a major investor in Belarus, having provided EUR 1.5 billion in financing for 66 projects as of September 2014. The bank has recently announced that it is ready to expand its operations in Belarus. Its ‘calibrated strategic approach’ to Belarus – in place due to concerns about the national government – currently limits the EBRD‘s engagement with Belarussian state enterprises.