Report from the Commission to the Council and the European Parliament Third monitoring report on steel restructuring in Bulgaria
Date: 2010-03-31
Institutions: European Commission
Subjects: Bulgaria, State aid, aid for restructuring, industrial restructuring, iron and steel industry, report

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EUROPEAN COMMISSION 

Brussels, 31.3.2010 
COM(2010)125 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Third monitoring report on steel restructuring in Bulgaria 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Third monitoring report on steel restructuring in Bulgaria 

1. 

INTRODUCTION 

In  Protocol  2  to  the  Europe  Agreement1,  the  European  Union  agreed  on  transitional 
arrangements for restructuring aid to allow Bulgaria to complete the restructuring process in 
the steel industry. Bulgaria was allowed to grant State aid for restructuring purposes, provided 
that: 

- it would lead to the viability of the benefiting firms under normal market conditions at the 
end of the restructuring period, 

- the amount and intensity of such aid was strictly limited to what was absolutely necessary in 
order to restore such viability and was progressively reduced, 

-  the  restructuring  programme  was  linked  to  the  rationalisation  and  reduction  of  overall 
production capacity in Bulgaria. 

The  original  restructuring  period  was  due  to  last  until  the  end  of  2006.  However,  Bulgaria 
indicated that it would not be able to meet the requirements of Protocol 2 under the existing 
National  Restructuring  Programme  (NRP)  and  Individual  Business  Plan  (IBP).  Therefore, 
before  its  accession  to  the  EU,  Bulgaria  submitted  a  modified  restructuring  programme  and 
business  plan  and  requested  an  extension  to  the  restructuring  period.  The  EU-Bulgaria 
Association  Council  Decision  3/2006  of  29  December  20062  amended  Protocol  2  to  extend 
the  restructuring  period  until  the  end  of  2008  and  set  out  the  monitoring  and  reporting 
obligations  for  the  Commission.  The  only  company  covered  by  the  extended  NRP  was 
Kremikovtzi AD.  

The Commission has adopted its two monitoring reports for the years 20063 and 20074.  

2. 

RESULTS OF MONITORING  

This  third  and  final  monitoring  report  supplements  the  previous  Commission  reports  and 
assesses the results achieved by the end of 2008, the last year of restructuring. Already in its 
previous reports, the Commission had noted non-compliance with the restructuring objectives 
listed in the Protocol concerning viability, technological and environmental investment, sales, 
cost  reduction  and  productivity.  Since  then,  the  Bulgarian  authorities  have  informed  the 
Commission  that  the  implementation  of  the  IBP  for  Kremikovtzi  AD  ceased  on  6  August 
2008 following the announcement of insolvency and the opening of a bankruptcy procedure 

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4 

OJ L 358, 31.12.1994, pp. 3–222. 
UE-BG 1908/06 — http://register.consilium.europa.eu/pdf/en/06/st01/st01908-re01.en06.pdf. 
COM/2008/511. 
COM/2009/146. 

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by  the  Sofia  City  Court.  The  company’s  operations  are  currently  being  supervised  by  a 
receiver appointed by the Court. 

2.1.  Monitoring of the key restructuring benchmarks 

State aid 

Association  Council  Decision  3/2006  sets  a  ceiling  on  the  amount  of  State  aid  that  can  be 
granted to Kremikovtzi AD and forbids the granting of public support to any other company 
in  the  steel  sector.  The  maximum  State  aid  amount  allowed  for  Kremikovtzi  AD  was 
BGN 432.6 million. However, since the company did not use, and thus did not receive, part of 
the aid for employment restructuring, the amount of State aid effectively paid out was BGN 
431.1 million.  

No  further  State  aid  was  granted  in  2008,  either  to  Kremikovtzi  AD  or  to  any  other  steel 
producer in Bulgaria. 

Capacity reduction 

In  order  to  offset  the  competitive  advantage  of  receiving  State  aid,  Kremikovtzi  AD  was 
required  to  permanently  close  a  rod  mill  with  a  capacity  of  500 000  tonnes  of  finished 
products. Monitoring has established that the mill was closed in conformity with the relevant 
EU legislation5 by the end of the restructuring period. 

Viability 

At the end of the restructuring period in 2008, Kremikovtzi AD was expected to have reached 
long-term  viability6.  However,  already  by  mid-2008,  the  company’s  situation  had  further 
deteriorated to such an extent that it was no longer able to service its debts, and bankruptcy 
proceedings  had  to  be  initiated.  According  to  the  Commission’s  State  aid  standards,  an 
insolvent company is not viable.  
The finding of non-viability is  further substantiated  by  the  company’s  financial  results.  The 
financial  data  submitted  by  the  company  cannot  be  considered  an  accurate  depiction  of  the 
situation since a number of significant matters have not been clarified and the auditors have 
refused to give an opinion on the unconsolidated accounts of Kremikovtzi for 2006, 2007 and 
2008.  However,  the  unaudited  financial  statements  show  that  performance  in  2008  was 
negative,  which  constitutes  non-compliance  with  the  viability  commitments  adopted  in  the 
Individual Business Plan (IBP). The results — -33.1 % EBITDA/turnover (target: 13.5 %) and 
-107.1 % EBIT/turnover (target: 1.5 %) — were even worse than in 2007. 
The main reason for this situation was a liquidity shortage due to the failure by the owners of 
the company to inject funds as an ‘own contribution’ as agreed in the IBP. One of the effects 
of  the  liquidity  shortage  was  a  negative  impact  on  the  credit  conditions  imposed  by  raw 

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Decision 3010/91/ECSC OJ L 286, 16.10.1991, p. 20. 
OJ C 244, 1.10.2004, p. 2  
Viability  implies  that  a  company’s  return  to  sustainable  profitability  at  the  end  of  the  restructuring 
period.  According  to  longstanding  practice  the  Commission  considers  that  the  companies  should 
achieve:  
- a gross operating result: i.e. % EBITDA (earnings before interest, tax, depreciation and amortisation) 
on turnover of at least 10 % for non-integrated steel companies and 13.5 % for integrated mills; 
- a minimum return: i.e. % EBIT (earnings before interest and taxes) on turnover of at least 1.5 %. 

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material suppliers, hence increasing the prices the company had to pay for raw materials (on 
top of price increases in the global steel market).  
Later  in  2008,  the  company  did  not  buy  raw  materials  on  the  world  market  but  engaged 
mainly  in  barter  trade  (as  a  result  of  continuing  liquidity  problems)  through  agreements  to 
provide finished products in exchange for raw materials. In consequence, the increase in the 
prices  of  raw  materials  had  a  very  limited  influence  on  company  viability  since  actual 
purchase  prices  were  not  subject  to  global  market  fluctuations  but  depended  rather  on  the 
operational conditions of Kremikovtzi AD.  
At the same time, viability was negatively influenced by the company’s strategy of requesting 
pre-financing conditions (in advance payments) from customers in exchange for lower selling 
prices.  Here,  the  company  focused  on  traders  rather  than  end-users,  in  spite  of  the  lower 
margins. Due to the conditions of these commercial agreements the company obtained selling 
prices lower than the market average. 

Cost reductions 

A  further  impact  of  the  lack  of  liquidity  was  the  failure  to  implement  the  modernisation 
investment necessary to render the company competitive, in particular in the liquid phase of 
steel  production,  where  state-of-the-art  technical  equipment  is  of  particular  importance.  In 
some  areas  such  as  energy  and  materials  consumption,  the  necessary  cost  reductions  could 
only be achieved in the longer term through the modernisation investment agreed in the IBP. 
In  the  period  2006–2008,  however,  such  investment  represented  43 %  of  the  IBP  target.  In 
2008, the technological investment implemented amounted to only 1.7 % of the IBP target for 
the year.  

A  further  reason  for  the  failure  to  reduce  costs  in  order  to  reach  viability  was  low  capacity 
utilisation in 2008 (steel production —  30 %,  semi-finished  and  finished products — 20 %), 
with the result that Kremikovtzi AD did not manage to reduce its consumption of utilities and 
raw materials per unit produced.  

In the period 2006–2008, environmental investment amounted to only 23 % of the IBP target.  

Productivity and employment 

During 2008, Kremikovtzi AD employed 5190 persons, which was 8 % below the IBP target 
for the year. Nevertheless, the productivity rate did not improve compared to 2007 because of 
low production volumes. Even in the first half of 2008, before the crisis, productivity reached 
20 % of the IBP target. By the end of the restructuring period, productivity reached 26 % of 
IBP  target  (less  than  20 %  of  the  international  standard)  and  only  13 %  of  the  average 
productivity achieved by other Bulgarian steel companies. This had a negative impact on the 
efficiency and effectiveness of the company’s business.  

2.2. 

Environmental protection 

Bulgaria  had  applied  for  a  transitional  period  for  the  application  of  the  IPPC  directive7.  By 
way  of  derogation,  Kremikovtzi  AD  should  have  obtained  a  fully  coordinated  permit  by  30 
October 2007, containing a binding timetable for achieving full compliance by 31 December 
2011.  In  April  2007  EMEPA  presented  its  decision  to  not  issue  an  integrated  permit  to 

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Council Directive 96/61/EC of 24 September 1996, OJ l257, 10.10.1996, p. 26. 

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Kremikovtzi AD. The company resubmitted an application in May 2007. The procedure has 
not been completed, however, due to the declaration of insolvency. 

3. 

CONCLUSIONS 

By  the  end  of  the  initial  restructuring  period  in  2006,  Kremikovtzi  had  already  failed  to 
achieve  the  restructuring  goals.  As  a  very  exceptional  occurrence,  the  company  had  its 
restructuring  period  extended  by  two  years.  However,  the  situation  did  not  improve  during 
this time and ultimately ended in the bankruptcy of the company.  
The  Commission  considers  a  substantial  effort  by  the  company  and  its  owners  to  be  a  key 
condition  for  the  granting  of  restructuring  aid.  Accordingly,  the  company  has  to  make  an 
‘own financial contribution’ to the financial support provided from public funds. The amount 
of own investment on which the IBP for Kremikovtzi was based has not been forthcoming. 
The  lack  of  capital  for  modernisation  investment  and  the  lack  of  working  capital  were  the 
main reasons why the company did not succeed in reaching viability.  
The  Commission  highlights  that  these  developments  were  not  due  to  the  economic  crisis. 
Already in the first half of 2008 and in 2007, the company operated several facilities below 
the IBP capacity targets, mainly due to the lack of working capital. The same reason hindered 
the  implementation  of  the  investment  programme.  In  the  first  half  of  2008,  operational 
performance  was  marked  by  a  severe  fall  in  sales  volumes  and  amounts,  combined  with  an 
increasing deterioration in operational conditions, causing losses. Both viability benchmarks 
EBIT and EBITDA were already negative. Consequently, the situation cannot be explained by 
the  global  crisis,  since  company  conditions  already  began  to  deteriorate  in  2007,  when  the 
steel  market  was  experiencing  exceptional  growth.  Also,  the  insolvency  procedure  was 
initiated in August 2008, before the financial crisis of September 2008.  

In  view  of  the  findings,  the  Commission  concludes  that  the  provisions  of  Protocol  2  to  the 
Europe Agreement8 and EU-Bulgaria Association Council Decision 3/2006 of 29 December 
20069 amending this Protocol were only respected in relation to the amount of restructuring 
aid granted and net capacity reduction. However, the Commission notes that the restructuring 
benchmarks (viability, productivity and cost reduction) were not achieved and were far below 
agreed targets. 

The  Commission  concludes  that  the  NRP  and  the  IBP  were  not  fully  implemented  and 
therefore are not in compliance with requirements of Protocol 2.  
As a legal consequence of the beneficiary’s failure to achieve the restructuring goals, Bulgaria 
has undertaken to claim reimbursement of the aid as agreed in the third paragraph of Article 3 
as  set  out  in  Article  1  of  the  EU-Bulgaria  Association  Council  Decision  3/2006  of  29 
December 2006 amending 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.’ 

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OJ L 358, 31.12.1994, pp. 3–222. 
UE-BG 1909/06 — Adoption Decision 3/2006. 

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The  recovery  obligation  resulting  from  this  commitment  has  been  acknowledged  by  the 
Bulgarian State aid authorities, who have initiated recovery proceedings. The recovery order 
has  been  challenged  during  the  bankruptcy  procedure.  The  Commission  has  explained  in 
detail  the  practical  and  legal  consequences  ensuing  for  the  Bulgarian  authorities.  This  final 
report confirms the initial Commission assessment. In this respect, the Commission should be 
kept informed of developments in the insolvency procedure, in particular regarding the claim 
for the reimbursement of State aid. 
In  parallel,  the  Commission  will  issue  a  decision  sui  generis  in  accordance  with the second 
paragraph  of  Article  3  as  set  out  in  Article  1  of  EU-Bulgaria  Association  Council  Decision 
3/2006  of  29  December  2006  amending  Protocol  2  to  the  Europe  Agreement,  according  to 
which: 
‘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.’  

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