Eastern European Industry Pays Steep Price for Contamination

ENVIRONMENTAL LIABILITY

IT is not easy to sell a factory in Eastern Europe. Many of the industrial enterprises still in state hands are too big, outdated, or wasteful to attract investors. Even the privatization of those enterprises that could be competitive is often complicated by investor concerns over earlier environmental contamination.

``It's very dangerous for investors to underestimate potential environmental liabilities,'' says Stephen Stec, an environmental lawyer with the Central and East European Law Initiative in Budapest. ``There are plenty of pitfalls out there for the unwary.''

It is no secret that Eastern Europe has serious environmental problems. And former Communist-run industries, with their emphasis on production, take a large share of the blame.

Outdated equipment and practices, poor maintenance, and state subsidies on energy and other resources together created an inefficient and dirty industrial sector. Toxic slag and airborne dust from smelters and steel plants have contaminated rivers, soil, and groundwater supplies in cities such as Plodiv in Bulgaria, Copsa Mica in Romania, and Kosice in Slovakia. Illegal hazardous waste deposits, leaking lines and fuel tanks, and poor storage of potential contaminants are commonplace.

``At most sites there's likely to be contamination due to careless operations, poorly maintained equipment, and improper waste handling,'' says Tibor Sarlos, who manages cleanup projects in Hungary for Comco-Martech Europe, a Swiss-American joint venture.

Cleaning up site contamination can be extremely expensive as the Electrolux company, the Swedish vacuum cleaning manufacturer, discovered firsthand. While negotiating the 1991 purchase of Hungarian appliance maker Lehel Kft., Electrolux conducted an environmental audit revealing serious soil and groundwater contamination from solvents, oils, and heavy metals. The cleanup costs were estimated at $270 million, nearly one-half of Lehel's total purchase price. Electrolux successfully negotiated with Hungary's State Property Agency to have the cleanup costs deducted from the purchase price, but not all investors have been so fortunate. ``We tell our clients that they have to do an environmental audit to see how much cleanup work needs to be done on the site and how much it will cost,'' says Victor Orth Jr., head of valuations in Budapest for the region for Coopers & Lybrand. ``If that figure is bigger than the purchase price, then you have a real problem.''

Some investors purchased property without carrying out their own environmental audits, especially in the early waves of privatization in Hungary, Poland, and the former Czechoslovakia. ``Environmental issues didn't come up in most cases except where pollution was clearly visible,'' says Sandor Keresztes, former Hungarian minister of the environment. ``It wasn't mentioned in the contracts, but later it may come out that there are problems.''

Even when releases from environmental liabilities pollution are included in contracts, investors are not always safe. A recent study from the Prague-based Institute for Policy Study concluded that many investors in the Czech Republic who purchased property during the first round of privatization are unlikely to receive promised reimbursements for cleanup of contamination. The reason: Environmental audits were not done, making it difficult to determine if contamination took place before the property changed hands.

Investors are taking notice. A 1992 survey by the Organization of Economic Cooperation and Development and the World Bank found that environmental liability is a greater concern to investors than political instability or infrastructure problems. The respondents -

1,000 of the largest Western manufacturing, construction, and mining companies operating in Hungary, Poland, and the former Czechoslovakia - indicated that their top environmental concern was liability for Communist-era pollution.

Off-site contamination is an issue that has hardly been broached, although most Central European countries have passed legislation absolving new owners from responsibility for past pollution. Some legal experts, however, are warning that such legislation could be reversed under a new government.