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Billion-euro pulp mill deal with RMK may be in conflict of interest

Aigar Kallas and Margus Kohava. Jan. 31, 2018.
Aigar Kallas and Margus Kohava. Jan. 31, 2018. Source: (Siim Lõvi/ERR)

Documents in the possession of ETV's "Pealtnägija" show that the State Forest Management Centre (RMK) and pulp mill developer Est-For Invest concluded an advance agreement guaranteeing the yet-unbuilt mill half of the RMK's pulpwood over a 15-year period. Critics of the deal see this as a conflict of interest or even prohibited state aid.

A €1 billion pulp mill planned for construction along the Emajõgi River in Southern Estonia has interest groups provoked, although officials confirm that every rule and best practice is being followed along the way, reported ETV's investigative program "Pealtnägija."

According to critics, however, the deal cut between Est-For Invest and the RMK is an unprecedented gift and prohibited aid worth tens of millions of euros, which looks all the worse as a key figure connected to the new mill, Mati Polli, was only recently a member of the supervisory council of the RMK.

In the protocol of intent, the RMK promises the new pulp mill half of all of its pulpwood over a 15-year period. This is an agreement worth at least €300 million, the implications of which are completely different from the point of view of project developers and critics, respectively.

According to Indrek Vainu, coordinator of the civic environmental nonprofit Helping Estonia's Forests (EMA), the agreement stinks like pulp.

"Giving gifts worth tens of millions of euros is not actually okay," Graanul Invest board chairman Raul Kirjanen.

Est-For Invest board member Aadu Polli noted, however, that there is just one exception in this agreement, and that is in the length thereof.

"If someone else had likewise submitted some kind of similar proposal, it would have gone this way for someone else as well," said RMK board chairman Aigar Kallas.

Pulp mill needs quarter of total prescribed yield

According to the plan, the wood refinery, or pulp mill, will use up three million square meters of wood per year, which currently equals a quarter of the annual prescribed yield.

The figureheads of the planned pulp mill are Est-For Invest board members Aadu Polli, 40, and Margus Kohava, 52.

"Pealtnägija" noted that their mantra is to keep Estonia's "green gold" at home — why transport timber abroad when it can be increased in value in Estonia?

"And this has constantly been a strain or something to consider for the forestry industry in Estonia, and at one point we got as far as looking into how it would be possible to build this mill in Estonia so that our forestry industry could reach the same level as in other countries," Polli explained.

According to Vainu, however, the entire mill is a bad idea.

"A very bad idea," the EMA coordinator confirmed. "In short, this is a plan that will inhibit nature and development or destroy nature. If you build a mill in Estonia whose annual need for raw material equates to, say, a quarter of the current annual prescribed yield, and we know that too much logging is taking place in Estonia, then a mill that needs a quarter of Estonia's total prescribed yield for normal operation is too much."

Polli: Wait and see

Raul Kirjanen, chairman of the board at Graanul Invest, which will end up competing with the planned mill for raw material, noted that the plans for the mill are just too big for the amount of raw material available in Estonia.

"I believe that this plan is too big for the environmental impact on Estonia," he said. "I think that this plan is clearly too big for the Emajõgi River. I think that the current development of biotechnology would allow for the production of high-quality products in much smaller volumes and in a much more environmentally friendly way."

According to Polli, however, such views today can only possibly be emotionally or historical experience-based.

"I would say that I would ask you not to base your position on historical experience, but rather wait for the results of the analyses and wait for the results of the studies that describe what can be accomplished today with modern technology," said Polli.

Critics: The game is rigged

Over the year since the plan for the pulp mill was first announced, the location of the future mill and its environmental and other impacts have been and will certainly remain cause for much dispute.

On the one hand, it is not unusual for the developer of the largest planned industrial investment in Estonian history to expect support from the state as well as politicians. On the other, critics say, the leaked document proves that the game is rigged.

Namely, Est-For Invest and the RMK are signing a protocol of intent, or essentially an advance agreement, that RMK is promising 50 percent of its total pulpwood to the planned mill, and for a period of 15 years.

"Why is one company being given a competitive advantage by the state and others aren't?" asked Vainu. "And this company is being given a competitive advantage before it even physically exists. Companies that have been operating in the Tartu area in Southern Estonia for 10-20 years already — why aren't they being given a competitive advantage? They are able to prove that they have been successful businessmen for years, good employers, good taxpayers. And then some kind of mill comes along that doesn't exist and suddenly it gets huge breaks from the state."

Kirjanen found that this was a very crude agreement representing very one-sided interests. "Based on this agreement, the state will be taking on the obligation to supply wood — and the price isn't set," he noted. "The length of the agreement is very long — the obligation is for nearly 20 years. And in reality, the developer won't be giving the state anything in return at all. I believe that this is clearly very damaging to both the RMK and the sector."

According to the men at Est-For, however, it is entirely logical that if they are going to build Estonia's largest mill, they will sign an advance and agreement in the first order with Estonia's largest wood producer, as to do the opposite would be absurd.

Kallas also added that a lengthy contract provides security for a state-owned company as well.

"It is clear that our mill will need raw material, and the RMK is Estonia's largest seller of raw material," Polli said, adding that in this case, the interests of the Estonian state and the RMK more or less overlap.

"For 15 years, there will be someone here who is constantly all but forced to buy wood," Kallas pointed out. "And this is why getting and signing such a contract would be extremely attractive."

RMK: No other companies making such an offer

Kirjanen noted that he has a great deal of respect for the directors of the RMK, with whom he has worked together for a very long time. "And I think they understand for themselves that giving such gifts worth tens of millions of euros isn't actually okay," he said. "I believe that, should this contract ever be signed, then we won't be the big casualty here; the casualty will be the citizens of Estonia whose money is paying for this charade."

Kallas, however, said that if there were other companies prepared to make such an investment decision and enter such a contract with the RMK, he would open them with open arms. "But I have to admit that unfortunately there have been no such companies thus far," he added.

"All market players would currently be very interested in such a contract, and that is why I am saying right now that in reasonable market conditions and with a slight wood deficit, we need to manage state assets reasonably," explained the RMK official. "We need the best solution for the long term, and clearly we need to consult with other market players, accept their offers and consider the conditions."

RMK, Est-For: This is an honest deal

"Pealtnägija" is in possession of a working draft of the document dated the beginning of January, but according to the parties involved, they intend to sign a contract including precisely such conditions on precisely those days.

RMK and Est-For both claim that it is an honest deal, and that anyone could have gotten the same deal at market prices.

"The contract is within all laws of the Republic of Estonia," Polli asserted. "The contract follows all RMK strategies exactly as all prior long-term contracts have. There is only one exception — that we must apply for a 15-year contract. Everything else here is exactly as it has always been; I don't see any real reason to call it any differently."

According to Kallas, Est-For is on equal footing with other competitors, and the contract is in no way a gift to them.

Previously, the RMK has only signed one other contract this long — with Kunda-based aspen pulp mill Estonian Cell — but the contract volume was less than half of that of the planned deal with Est-For.

Kallas confirmed that the book value of the Est-For contract is €300 million, but competitors claim that the actual value accounting for inflation is closer to €450 million.

Attorney: Contract may constitute prohibited aid

Tarmo Peterson, the competitors' advising attorney, noted that as the RMK is a state-owned company, this contract may well even constitute prohibited state aid.

"The biggest problem is definitely the matter of state aid — whether promising one specific company a large amount of pulpwood resources for 15 years without a transparent procurement procedure is in accordance with EU rules on state aid," noted the attorney.

This would count as free market distortion, the most infamous case of which Estonia has seen was that of Estonian Air, in which case the European Commission ordered the airline to pay the prohibited state aid back to Estonia, bankrupting the flag carrier.

"Is the state in concluding this contract via the RMK behaving like a private business?" Peterson asked. "Or then let's ask the other way around: would a private business who has the kind of wood resource at their disposal that the RMK does sign a 15-year contract under such conditions? And I believe that the answer here is no. The issue is in the advantage — through this security of supply, these exclusive supply rights — as by receiving this resource, Est-For will essentially be given an advantage that its competitors on the market will not have. If one business has some kind of an advantage that the others do not, then that creates a distortion of competition on the market."

Kallas asserted that the RMK has no intentions of ever signing a contract that would break state aid-related rules.

Vainu, however, noted that, should this contract at some point constitute prohibited state aid, that would mean that the Estonian state and the Estonian people would have to pay for it.

"Once again some businessmen's bad idea and the problems caused by it, whether they are environmental or problems and expenses caused by the violation of competition law — it is the state and people that will pay, not them," said the nonprofit coordinator.

Key mill investor previously senior official at RMK

According to critics of the pulp mill plan, the whole situation is suspicious, as until 2016, businessman Mati Polli, father of Aadu Polli and one of the new mill's key investors, served as chairman of the supervisory board of the RMK, and thus effectively also Aigar Kallas' boss.

"Was there perhaps a situation in which someone working as chairman of the board at the RMK prepared business for his best friend Margus Kohava and his son Aadu Polli at work?" Vainu described. "There are very, very strange things going on here, very quickly."

65-year-old forestry industry veteran Mati Polli is a stable fixture on business daily Äripäev's list of richest people in Estonia. The RMK supervisory board under Polli's leadership confirmed Kallas' salary — which in 2016, for example, was nearly €8,000 per month before any bonuses — and set bonuses for the board of the RMK. As RMK supervisory board chairman, Mati Polli had access to nearly all RMK documents and thus insider information.

RMK, Polli deny conflict of interest

Est-For Invest, in which the elder Polli is a shareholder via a business, was established three months before he left the supervisory board of the RMK, on Oct. 3 and Dec. 22, 2016, respectively. The plan for the €1 billion pulp mill was revealed soon after, in January 2017.

"No, this is definitely not a conflict of interest situation, as it is currently the year 2018," Mati Polli stated. "That which you are talking about is the year 2016. According to general principles of management, it is dictated by law what is within the competences of the supervisory board and what is within the competences of the management board. One of the very few possibilities the supervisory board has to influence the management board at all is strategies, and these strategies are long since written in all organizations and they are always public. We are likewise guided by public strategies."

Polli confirmed that there was no specific talk of planning such a mill while he was still a member of the RMK supervisory board.

"To be honest, there was no talk about it in any way, shape or form, because as I said, I also only just found out about it at the beginning of last year," he added.

"Pealtnägija" believed it was worth noting that Mati Polli is one of the primary financers of the pulp mill plan, and yet he is still trying to avoid the spotlight for as long as possible, and his representatives stated that there was no chance of getting an interview with him.

As the matter of holding two positions at once concerned him directly, "Pealtnägija" nonetheless attempted to called him. "Thank you, I don't give interviews — I don't give interviews," Polli said on the phone before hanging up as the reporter tried to ask him a question.

The RMK also confirmed to "Pealtnägija" in writing that there was no situation in which a conflict of interest could have arisen; Mati Polli only read the documents submitted by the RMK's management board and did not personally browse the state-owned company's document systems, although he did have access to them.

Editor: Aili Vahtla

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