Anger at Sale of Biggest Montenegrin Firm

Tuesday, 2 August, 2005

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Marjana Buljan

Economists and ecologists are urging the Montenegrin government not to go ahead with its planned sale of the Podgorica Aluminium Complex, KAP, to the Russian firm Rusal.

They say the deal is not accompanied by sufficient environmental guarantees and will cost the republic financially in the long term.

This follows Podgorica's announcement in April that it had reached an agreement with Rusal over the sale of its 65 per cent stake in Montenegro's biggest company. The contract between the tender committee and the buyer is expected to be signed this month.

According to tender committee representatives, Rusal offered 59 million US dollars for the shares and pledged to invest 67 million dollars over the next five years. In addition, Rusal said it would pay off KAP's debts to the tune of 110 million dollars.

And Montenegro's prime minister Milo Djukanovic has disclosed an unusual provision in the contract, obliging KAP's buyer to pay 27 million dollars directly into the republic's budget by the end of the year.

While the government will clearly welcome the instant cash payment, independent economists and analysts claim the sale will lead to less welcome side-effects, such as increased pollution. They also say the subsidised electricity prices that the government has offered Rusal as an incentive will turn into a financial liability.

The government is adamant the sale will go ahead. Its policy is to sell off former state-owned companies to raise cash for infrastructure projects and to balance its budget. The sale of KAP shares to Rusal will account for ten per cent of the government's revenue in 2005.

No one questions KAP's significance in Montenegro's overall economic picture. The aluminium complex is tied into around half the republic's total economy through subsidiaries and dependent companies.

KAP produced 121,000 tonnes of primary aluminium and 245,000 tonnes of aluminium oxide last year. The lion's share of the output has been exported, accounting for more than half of Montenegro's total exports.

The sale agreement was struck at a meeting between Djukanovic and Rusal's majority owner, Oleg Deripask, who came to Podgorica for the occasion. The Montenegrin authorities say the deal is favourable and reject the criticisms of economists and ecologists.

A fundamental economic objection concerns the subsidised price for electricity that KAP, Montenegro's biggest power consumer, will have to pay.

Podgorica had little option. Most companies producing primary aluminium have closed in Europe in recent years or relocated to the Far East, where energy is cheaper. To obtain its own cheap and plentiful power, Montenegro planned to construct a new hydroelectric power plant, which involved flooding part of the Tara river canyon. But the outcry over the proposed destruction of this UNESCO-listed site forced it to back down.

As a result, Montenegro still relies on importing electricity from neighbouring countries at a price of around 3.5 cents per kilowatt-hour, kwh, but has offered Rusal a price of just over two cents per kwh during its first year of operation in Montenegro.

Estimates of how much revenue Montenegro stands to lose from providing subsidised electricity to Rusal range from 61 million dollars to more than double that amount over the five years in which Rusal will enjoy a preferential rate.

The government says it is not unusual to offer subsidised electricity to key consumers, such as KAP. "The Rusal offer is the best we had," said Djukanovic. The Russian company was, in fact, the only contender.

One of the members of the ruling coalition, the Social Democrats, SDP, however, is also critical. It says the economy will suffer on account of the losses incurred by the subsidised electricity given to KAP. In a parliamentary debate on the sale, SDP officials asked why they should subsidise KAP's future foreign owners, saying taxpayers would have to make up the loss. SDP officials walked out of privatisation bodies earlier this year about arguments over the sale of KAP and other companies.

Some foreign economic experts have also criticised the transfer of KAP's past privileges to the new owners. "The subsidies given to KAP will be paid for by everyone else and are a major expense for everybody in Montenegro," Ian Brown, of the European Reconstruction Agency, told the local media.

Djukanovic said late in April, a few days after announcing the Rusal deal, that electricity prices would have to rise as part of a general power grid reform.

The lack of proposed ecological investment has also sparked complaints about the Rusal deal. The Russian side has offered to invest 67 million dollars over five years in technology and 24 million dollars in environmental protection programmes.

"The RUSAL offer does not guarantee KAP's modernisation nor is it sufficient to provide ecological protection," said Nebojsa Medojevic, director of the Group for Change, GZP, a local non-governmental organisation. According to the GZP, 122 million dollars needs to be spent on measures such as installing expensive filters needed to protect the environment.

The KAP complex is located barely ten kilometres from the capital Podgorica and is widely considered the republic's biggest single polluter. It is also situated in the middle of an agricultural area, the fertile Zeta valley, where most of the republic's vegetables and fruits are grown. The environmentally precious resource of Lake Skadar, home to countless fish and rare birds, such as the pelican, lies close by.

Ecological organisations fear KAP's allegedly poor waste disposal practices pose a threat to the lake, the Zeta valley and to Podgorica itself. Ana Misurovic, director of the Ecological Toxicology Centre, said she believed the settlements closest to KAP were virtually uninhabitable.

"Toxic waste several times higher than the permitted level has been detected in the air, water, food supplies and soil here," she wrote in a report that has been cited in recent court cases. "This can cause mutations, cancer and other hazards."

Government officials agree there is a problem over pollution but claim that environmentalists have blown it out of all proportion.

Assistant Environment Minister Nada Mugosa said, "The figures [in the report] do not relate to the entire Zeta valley and the Podgorica District, as the SZP has claimed.

"The figures were established after a 2001 accident, when red river silt spilled out from a containing pool and they related only to a specified location near KAP."

However, green groups are not convinced. In a bid to emulate the success of the nationwide campaign over the Tara river canyon, the Group for Change and ecological NGOs in April launched a similar petition, calling for a halt to the sale. More than 6,000 citizens signed a declaration in only a few days and most opposition parties said they would support it in parliament. They want to annul the sale of KAP until an independent committee has determined the exact status and needs of the surrounding environment.

Independent analysts are critical of the sale for different reasons. Some say the government is mistaken in orientating its privatisation policy towards the repayment of immediate debts.

At present, KAP owes 135 million dollars to Vektra of Podgorica, Glenkor of Switzerland and the London Standard Bank. As the buyer, Rusal is obliged to pay off the debts of at least two of these creditors.

Zarko Rakcevic, an economist and a former deputy prime minister, last summer warned in the debate on privatising KAP that the privatisation process would either fail entirely, or would attract buyers who were unwilling to invest in modernisation and the environment because of their need to pay off the company's existing debts.

Geoffrey Sachs, a US economist and sustainable development adviser to UN Secretary General Koffi Annan, advised Montenegro last summer to consider shutting the aluminium plant to preserve the habitat and also to avoid incurring financial losses stemming from subsidised electricity prices.

KAP's new owner, however, has said annual aluminium output would increase by 50,000 tonnes, adding that there would be a substantial rise in the production of aluminium oxide.

Environmentalists say a rise in production without fresh investment in ecological protection means increased pollution.

"The KAP privatisation was aimed at enticing a strategic partner prepared to invest in modernisation and preserving the habitat," Branko Radulovic of the ZP told Montenegrin television. "Rusal is interested in neither objective but only in exhausting our natural resources."

KAP's managers have dismissed this as negative nitpicking. "Six or seven years ago, the critics then suggested that KAP should be sold for one dollar," Mihajlo Banjevic, chairman of the KAP's board of directors, told the Podgorica daily Pobjeda after the government had accepted Rusal's offer.

"Today, they are unhappy with a 245 million dollar investment… modernisation, debt repayment as well as ecological protection."

Marjana Buljan is IWPR/BIRN project manager in Podgorica and Milka Tadic is a regular IWPR/BIRN contributor.