Montenegro ready to provide power subsidies to aluminium firm KAP again

By bne IntelliNews July 17, 2013

The Montenegrin government is ready to extend new electricity subsidies to aluminium firm KAP in order to organise a sustainable production at the firm, which entered liquidation earlier this month, PM Milo Djukanovic said as quoted by news agency Mina-Business.

Djukanovic told reporters on July 16 the government is ready to subsidise the plant with EUR 10 per MWh. He was speaking at a four-hour conference on the future of the country's aluminium industry.

He also said power producer EPCG is in general ready to sign a long-term supply contract with KAP at EUR 27.5 per MWh with the state aid of EUR 10/MWh. However, the signing depends on the state response to KAP's unpaid bills towards EPCG.

Djukanovic told the conference it is possible to organise successful production at troubled KAP but it needs to meet several conditions - KAP should produce 50,000 tonnes of aluminium annually; employ a maximum of 500 workers (compared to current 1,200); needs to pay an electricity price no higher than EUR 27.5/MWh.

A Montenegrin commercial court launched bankruptcy proceedings at KAP on July 8 after the finance ministry requested the move last month over some EUR 25mn of unpaid debt. The court estimated KAP’s debts at EUR 380mn, adding the company’s nominal value is only EUR 183mn.

According to Djukanovic, most of the debt has been carried over from the pre-privatisation period. KAP was sold to Russia's En+ Group in late 2005 when its outstanding liabilities stood at EUR 320mn. The PM said KAP generated an overall revenue of EUR 1.256bn in 2006-2012 when its operational costs totalled EUR 1.352mn.

He added that via the insolvency the government has decided to once again step in and help KAP, aiming to prepare it for a new beginning after the restructuring and possibly for a new strategic partner.  

FAILING TO FACE THE ELECTRICITY SUPPLY ISSUE

KAP's main problem before and after the privatisation has been the high electricity charge. Recently, En+ Group suggested that the Montenegrin authorities impeded in the past its attempt to build a new power source for KAP - when they cancelled a tender won by the Russian company for the privatisation of the country's sole thermal power plant TE Pljevlja and its adjacent mining firm.

Djukanovic reminded on July 16 that the main idea when KAP was built in 1970 was that it will consumer power produced in the Piva plant, one of the two big hydropower plants in the country, paying some EUR 15 per MWh. For comparison, in 2007 KAP was already paying EUR 39.5 per MWh - nearly threefold higher than the early plans.

Djukanovic also reminded the circumstances around En+ Group's failed attempted to privatise TE Pljevlja. The parliament cancelled the privatisation in 2007. The Russian investor offered EUR 50mn for the assets (EUR 45mn for the plant and EUR 5mn for the mining firm). It had also proposed to invest EUR 10mn in the existing unit and build a second unit of 225 MW worth EUR 170mn by end-2011, submitting a bank guarantee for the sum. The idea was that via this project the complex relations between KAP and EPCG would have ended with EPCG no longer having the obligation to supply KAP with power.

Djukanovic even claimed that the 2007 parliamentary decision marked the beginning of the downward trend in KAP's business.

MONTENEGRO'S 2009 DEAL WITH CEAC ON KAP'S STATE GUARANTEES

Djukanovic also defended the 2009 agreement between the government and CEAC - a subsidiary of En+ Group that back then controlled a majority stake in KAP. Under the contract, the government issued EUR 135mn state guarantees to the aluminium firm and in return took over half of CEAC's holdings in KAP, acquiring a nearly 30% stake in the aluminium firm.

Djukanovic said that the state intervention was needed at the time to ensure KAP will continue to exist in the year of the global plummet of the aluminium industry because of the tumbling aluminium prices. He noted that amid the crisis the aluminium price on the global market dropped to USD 1,275 per tonne in Feb 2009 from USD 3,375 in July 2008. This resulted in some USD 1,000 loss per each tonne produced by KAP.

The government therefore took the decision to intervene in the interest of the economic and social stability of the country and aiming to keep the company's potential for future growth.

The circumstances, under which the government decided on the move on KAP's restructuring include the following - KAP earning EUR 302mn revenue in 2008; exporting EUR 270mn in the year to generate 45% of the country's exports; 2,700 jobs were directly linked to KAP and at least the same amount indirectly; KAP paid EUR 12-13mn annually to the state budget as taxes and fees. Furthermore, the banking system was highly dependent on KAP because of the company debts and the loans to employees and other firms servicing KAP.

According to Djukanovic, the criticism that the 2009 agreement was made against the state interests is one of the biggest fabrications about the company circulating in the Montenegrin public space. 

The state guarantees issued to KAP under the deal have already been activated, resulting in the need for budget revision. First Deutsche Bank activated last year the EUR 23.4mn guarantee issued on its loan to KAP and then earlier this month VTB Bank and OTP activated the remaining EUR 102mn, just before KAP entered insolvency.

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