OOO Kronospan/OOO Kronohim - Expansion

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The proposed Project is a follow-on investment in an existing client, OOO Kronospan / OOO Kronohim, which is located near the town of Egorievsk, 107 km SE of Moscow. The Client has successfully constructed a Greenfield operation that produces medium-density fibreboard (MDF), particleboard and lacquer board; a resin production facility was also built. The financing will be used to triple the production capacity of the resin plant, allowing the Company to meet growing market demand for MDF products. Total Project costs are estimated at EUR 35 million, which will be financed by a syndicated loan facility. The transition impact potential of the project is derived primarily from the positive influence of a reputable foreign strategic investor on the restructuring and modernisation of the Russian wood-based panel industry. Kronospan was the first foreign investor to start MDF and resin manufacturing operations in Russia while domestic production was in its very early phase of development. Strengthening competition within the sector as well as setting product quality, technological and business standards have been the main contributions to this process. Strengthening of market interactions and linkages in other related sub-sectors is another potential transition merit of the transaction. Upstream, Kronospan is a demanding client of local logging companies, insisting on certain standards of quality and service when purchasing timber. Kronospan is also improving the environmental efficiency of the logging industry by using wood residue and sawdust in its production. Downstream, Kronospan is supplying high-quality MDF panels / sub-products and resin to the local Russian construction and furniture manufacturing industry, thereby reducing the need for expensive imports, which in turn will reduce end-prices and increase accessibility of the end-product to Russian consumers. Kronospan is the global leader in the manufacture of MDF/MDF sub-products & particle board, as well as MDF & particleboard resin, and operates plants across Western and Eastern Europe. The company has been investing in Central and Eastern Europe since 1989. EBRD has provided financing to several Kronospan projects in the Bank's Countries of Operation. EUR 35 million syndicated facility, with the Bank's participation of up to EUR 21 million. EUR 35 million. Screening categories and rationale for classification Environmental issues associated with resin production are limited and can be easily mitigated with modern technology, project design and construction planning and work practices. The project site is on industrial land in the sparsely populated outskirts of the town of Egorievsk. The nearest permanent residential properties are at a distance of 560 m from the resin plant. The environmental issues associated with the project can be readily identified, assessed and mitigated and EBRD has classified the project B/1, requiring an Environmental Analysis to assess the incremental environmental impacts arising from the expansion of the resin plant and an environmental review of the recently constructed facilities. Information reviewed during the environmental appraisal The Environmental Analysis has been based on the technical-economic assessment of the investment (TEO) and assessment of impacts on the environment (OVOS) prepared in accordance with the requirements of Russian law. Additional information on the resin plan expansion has been provided by Kronospan and the resin plant supplier. EBRD's environmental specialist has conducted environmental due diligence visits to the project site in November 2003 and October 2006. Key environmental issues and mitigation measures The investigations showed that the planned resin manufacturing facilities, including transport, storage and manufacturing elements, would fully comply with Russian Federation regulatory requirements and EU Best Available Techniques (BAT) for Large Scale Organic Chemicals Manufacturing providing for appropriate management of hazardous materials and resin manufacturing. Production based on conversion of methanol to formaldehyde in a catalytic oxide process and catalytic burning of exit gases generates in excess of heat that would be used for production of steam for the wood processing facilities on the site thus improving the energy efficiency of the whole Kronospan plant and offsetting use of some fuel (gas) in boiler station. The designed technology would include an effective emission control system based on catalytic conversion, in which virtually all carbon compounds were oxidized to carbon dioxide and water. This would enable Volatile Organic Compounds emissions be kept well below the strictest legal limits. Ambient air concentrations of formaldehyde and other key air emission parameters are being monitored to ensure compliance with Russian Federation regulatory requirements and EU guideline limits and this practice will be continued. All waste water contaminated with chemicals is being recycled to the production process. The produced high-grade resin of E1 quality bonds formaldehyde to such an extent that the free formaldehyde content in wood-based products is well below the strictest norms and help ensure the environmental safety of the products. Monitoring The Company is systematically monitoring and reporting its environmental, social and health and safety impacts to ascertain compliance with Russian and EU environmental standards, including Best Available Techniques for the industry sector. The EBRD would evaluate the project's compliance with the applicable environmental and social requirements during the lifetime of the project by reviewing annual environmental reports prepared by the Company and by conducting periodic site supervision visits. None. Markus Habegger, Project Manager OOO Kronospan Egorievskiy Raion, Pos, Noviy D. 21, RU-140341 Moscovskaja Oblast, Russia Tel.: 007.096.4048500 Fax: 007.096.4067449 Mobile: 0049.172.3084689 Email: skraclova@kronospan.cz Nick Matveieff, Finance Director Kronospan Holdings Limited 2 Andrea Zakou Street, Office 102, CY 2404 Engomi, Nicosia, Cyprus Tel.: 00357.22.590031 Fax.: 00357.22.590156 Mobile: 0044.7836.535057 Email: n.matveieff@kronospan.co.uk