BULGARIA: Steel Plant Privatisation Fails to Deliver

By Claudia Ciobanu Reprint | | Print |

Claudia Ciobanu

SOFIA, Mar 13 2008 (IPS) - The steel plant at Kremikovtzi, the pride of Bulgaria in its socialist days, is nearing collapse after privatisation failed to deliver.

Thousands of Kremikovtzi workers have taken to the streets of Sofia on several occasions this year, asking for salaries and calling for a change of ownership.

In all 71 percent of the shares of Kremikovtzi are owned by Global Steel Holdings Ltd. (GSHL), the company of Indian businessman Pramod Mittal, younger brother of Laxmi Mittal who is chairman of Arcelor Mittal, the largest steel company in the world. The Bulgarian government owns 25 percent of the shares.

Kremikovtzi was privatised in 1999, when 71 percent of its shares were sold for one dollar to the mostly Bulgarian owned Finmetal Holding. In 2005, Finmetal was acquired by GSHL.

"It is obvious that (Pramod) Mittal does not have money to invest and therefore the state has to look for a new investor," says Lyudmil Pavlov from Podkrepa, one of the main trade unions in Bulgaria.

"Merrill Lynch, which was appointed to investigate the best alternatives, is supposed to complete the search for a strategic partner," Kremikovtzi spokeswoman Maria Todorova told IPS. "Kremikovtzi is interested in consolidating its normal operations process within the next three months."

The main service providers to the plant – the state railways, and gas and electricity companies – have either cut or reduced supplies to the steel plant because of outstanding debts running into millions of euro.

In February, the National Agency for Post-Privatisation Control fined Kremikovtzi 239.3 million leva (120 million euro) for failing to meet commitments stipulated in the privatisation contract.

When it bought Finmetal in 2005, GSHL made a down payment of 110 million dollars (72 million euro) and promised to invest at least a further 350 million dollars (228 million euro) in the plant. Kremikovtzi has a production capacity of 1.4 million tonnes of steel annually, and employs 6,000, down from 15,000 in 1989.

But GSHL has hardly made any investments in Kremikovtzi. GSHL in fact borrowed 300 million euro by way of a bond issue which it guaranteed with assets of the plant.

A worker from Kremikovtzi told journalists that improvements have been made on the outside of the plant and to make equipment look new, but that inside facilities are rotting.

At a press conference in Sofia Feb. 8, representatives from the trade unions Independent Syndicates Confederation and Podkrepa accused the management of asset stripping. According to the trade unionists, several central elements of the plant infrastructure – the Prokopna railway station, the ready production storehouse, the spare parts storehouse and the chemical waste depository – have been sold.

Asked to comment on these accusations, Maria Todorova from Kremikovtzi told IPS that the management "does not consider necessary to comment on the statements, standards or intentions of independent sources, such as trade unions in our country."

The names of several potential buyers for the plant have been aired. Most prominent among them is controversial Ukrainian tycoon Konstantin Zhevago, but Bulgarian media reports that Pramod Mittal rejected his offer of 20 million euro as too low.

The government seems committed to finding a buyer for the plant, but this has been made difficult by the high cost of environmental upgrades needed to keep the factory going.

Levels of pollution in the area are so high that even an alternative plan proposed by Sofia mayor Boyko Borisov – to tear down the plant and create a luxurious commercial and residential space – does not seem feasible.

"While the mayor of Sofia told Brussels (the European Commission) that harmful emissions are only two to five times above the allowed rate, they are ten to 30 times above the permissible norm, according to data from the General Labour Inspectorate and the Regional Inspectorate of the Environment and Water Sofia," Petar Penchev from the environment group National Movement Ekoglasnost told IPS.

It&#39s another story with the Romanian steel plant Sidex, the biggest in that country, which was bought by Pramod Mittal&#39s brother Laxmi Mittal.

Some economists there have argued that this was a bad deal for the Romanian government, which did not keep any shares in the plant, and charged Mittal less than 70 million euro – while erasing debts and providing state aid worth more than one billion euro.

More than half of the 30,000 employees were sent home, albeit with compensatory payments. The plant has been allowed to invest mostly in production until 2014. But the prospects are that production, currently 4.6 million tonnes a year, will rise further. The net profits, which reached 50 million euro in 2006, are growing each year, making it unlikely the plant will be abandoned.

So why was a similar story not possible in Bulgaria? "I suppose it is simply corruption," says Dimitar Stefanov, vice-dean of the Faculty of Economics at the University of Sofia.

In 1999, Stefanov was a senior consultant at Raiffeisen Bulgaria and a member of the advisory team of the Bulgarian government on the privatisation of Kremikovtzi. Stefanov told IPS that although the advisors recommended another company, the government chose Finmetal "who are not even steel makers; they are steel dealers."

Well before negotiations for the sale began, Stefanov says he was told by a trade unionist that Kremikovzti would go to Finmetal, in a sign that the deal had been fixed already.

"Kremikovtzi was turned into a cost centre and a pollution centre, while the gains went outside Bulgaria to offshore companies and the Bulgarian government continued to pay state aid to the company," Stefanov told IPS. He said the same pattern was repeated in Finmetal&#39s sale to Mittal in 2005.

"I suspect it is an arrangement between the owners of Finmetal and Mittal. I know that they continue to work together. Maybe they have other plans, because the land on which the plant lies is the best part of Sofia valley."