Summary of Commission Decision of 15 December 2009 on the National Restructuring Programme and the Individual Business Plan for the Bulgarian steel producer Kremikovtzi

In line with Article 9(4) of Protocol 2 to the Europe Agreement (1), Bulgaria made use of the opportunity to restructure its steel industry with public support before accession. To this end, Bulgaria set up in 2004 a National Steel Restructuring Plan (‘NRP’) and an Individual Business Plan (‘IBP’) for the sole beneficiary Kremikovtzi AD. By Council Decision of 18 October 2004, the plans were found to be compliant with the requirements of Article 9(4) of Protocol 2 to the Europe Agreement.

The restructuring period agreed for Kremikovtzi was due to end on 31 December 2006. Upon request by Bulgaria, and subject to the full implementation of a new IBP for Kremikovtzi or a commitment by Bulgaria to recover if this does not happen, this period was prolonged by additional two years until the end of 2008. To ensure control of the implementation of the new business plan after accession, the EU-Bulgaria Association Council adopted a decision on 29 December 2006 (‘AC Decision’) which laid down the procedural framework for monitoring and potential enforcement in the event monitoring showed that the plans were not implemented as agreed:

‘1.

The European Commission shall regularly monitor the implementation of the restructuring programme and the plans referred to in Article 2 on behalf of the European Community. The Ministry of Finance shall do so on behalf of Bulgaria. The European Commission may require Bulgaria to take appropriate steps to modify the restructuring plan for Kremikovtzi AD company in case the fulfilment of the requirements of Article 9(4) of Protocol 2 to the Europe Agreement are unlikely to be fulfilled.

2.	The Commission shall decide whether the restructuring programme and the plans are fully implemented and are in compliance with the requirements of Article 9(4) of Protocol 2 to the Europe Agreement.

In case monitoring of the implementation of the restructuring programme and the plans shows that the relevant conditions of Protocol 2 to the Europe Agreement and key restructuring measures, including all investments implemented, have not been fulfilled or that in the course of the restructuring period Bulgaria has granted additional State aid in favour of the steel industry, and to Kremikovtzi AD in particular, Bulgaria shall recover from the beneficiary any aid granted in breach of these conditions before or after its accession to the European Union.’

Kremikovtzi is the largest Bulgarian steel producer. In the period 1998-2005, the company benefited from public support totalling EUR 222 million. These funds were qualified compatible restructuring aid provided certain conditions are met, in particular the full implementation of the IBP. Under the IBP agreed by the Commission in 2006, Kremikovtzi was expected to have reached long-term viability by 31 December 2008. Key elements of the IBP were: a total of EUR 560 million investments in modernisation and environmental protection, reduction of production cost and increase of product quality. Kremikovtzi was to have reached long-term viability by 31 December 2008. On 6 August 2008 however, the Sofia City Court initiated a bankruptcy procedure for Kremikovtzi because the company was no more able to serve its debts.

In line with the AC Decision, the Commission assessed whether Kremikovtzi fully implemented the IBP and came to the conclusion that this is not the case. Out of the modernisation investments scheduled in the IBP of 2006, only 43 % had been implemented. This had a detrimental effect on the improvement of the product quality and on cost reduction. The total investments carried out for environmental purposes amounted to only 23 % of the funds the company was obliged to invest. As a result the company did not obtain the coordinated permit needed for further production. In addition, the company was not provided with sufficient working capital which had a negative impact on credit conditions and purchase prices. The Commission also notes that these main reasons for the company's failure to successfully restructure are endogenous and are not linked to the economic crisis which started affecting the steel industry only in fall 2008.

The Commission notes that Bulgaria has so far complied with this obligation insofar as the Bulgarian authorities have initiated proceedings in view of recovery of the aid granted to Kremikovtzi after the company was declared insolvent in August 2008, without awaiting a previous Commission Decision,

The restructuring programme and the plans for Kremikovtzi AD are not fully implemented and are therefore not in compliance with the requirements of Article 9(4) of Protocol 2 to the Europe Agreement.