IFC requires that this document is made available through the World Bank InfoShop and to the locally affected community no less than 30 days prior to project consideration by the IFC Board of Directors. The Summary of Project Information (SPI) also provides details of where the ERS has been made available to the locally affected community. The SPI must be sent to World Bank InfoShop no less than 30 days prior to project consideration by the IFC Board of Directors.

This is a category B project according to IFC’s environmental review procedure because specific impacts may result that can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. The review of this project consisted of visits to production facilities, consultations with the project sponsor’s management, and appraising technical and environmental information submitted by the project sponsor. The following potential environmental, social, health and safety issues and impacts of the project were analyzed: - Raw material sourcing and use of sustainably harvested woods; - Environmental, health and safety management systems - Source and quality of environmental emissions (e.g. air, wastewater and sewage, noise); - Occupational health and safety conditions in all facilities; - Life and fire safety standards of all existing and planned facilities; and - Labor and community relations.

The company has presented a Corrective Action Plan to address these impacts, and to ensure that the proposed project will, upon implementation of the specific agreed measures, comply with the environmental and social requirements, host country laws and regulations and the World Bank Group (WBG) environment and social policies and environmental, health and safety guidelines. The following paragraphs provide a discussion of each of these issues and how potential impacts will be mitigated by the company. - Raw material sourcing: KVC consumed nearly 85,000 m3 of wood resources in 2004 and shipped approximately 38,400 m3 of furniture. Approximately 51% of this wood was imported in the form of roundwood from Uruguay, Malaysia and Papua New Guinea among others countries. Another 3% was imported in the form of Medium Density Fiberboard (for use in indoor furniture) from Malaysia. The balance of wood supply is sourced domestically. KVC has responded to the growing international market demand, particularly in outdoor furniture, for products manufactured from wood that is legally harvested from responsibly managed sources. Both Khai Vy and Duyen Hai operations have maintained a valid ‘chain of custody’ certification from the Forest Stewardship Council (FSC) since 2000. The Vietnam office of SGS Qualifor conducts annual audits of the company’s operations for renewal of this certification. As a requirement for the use of the FSC label, a product must contain a minimum of 70% FSC certified content by weight. Of the 38,400 m3 of furniture shipped by Khai Vy in 2004, 35% was labeled FSC certified. Approximately 29% of KVC’s imported roundwood is obtained from FSC certified sources – the majority from Uruguay (Eucalyptus and Pine) and the Solomon Islands (Eucalyptus and White Teak) with smaller quantities obtained from South Africa (Eucalyptus and Pine) and France (White Oak, Beech, Cherry and Maple). Non-FSC certified tropical hardwoods including Balau, Keruing, Kapur and Meranti from Malaysia and Papua New Guinea make up the balance of the company’s roundwood imports. A small percentage of Keruing and all Rubberwood (accounting for 6% of all roundwood procured in 2004) is sourced domestically. The harvesting of wood from natural tropical forests is banned in Vietnam and, to date, there is no plantation certified for sustainable management by any international body. No domestic plantation development is proposed under this project. However, the company will be required to comply with the WBG Forestry policy should it develop its own plantations in Vietnam. - Environmental, health and safety management systems: The Khai Vy Administration and Personnel Department is responsible for the management of environmental and occupational health and safety performance in all company facilities. Khai Vy obtained ISO 9001 certification (Quality Management Systems) in 2002 and was re-certified in 2004 following an audit by the Vietnam branch of SGS. The Duyen Hai operations obtained ISO 9001 certification in 2004. The focus of the Khai Vy’s Quality Management System to date has been on quality control of its production. The company’s application of the system to environmental and occupational health and safety (OHS) has not kept pace with the company’s growth. As a result, improvements in environmental and OHS performance will be required by IFC as a condition of its investment in the company. - - Source and quality of environmental emissions: The government Department of Science and Technology maintains quality standards for potable water, wastewater, ambient and point source air emissions, workplace noise, dust and temperature, and provides certification of compliance to the Khai Vy facility on an annual basis. Although compliant with Vietnamese standards, reported levels of temperature, noise and dust throughout the facility exceed WBG standards. The company was unable to provide monitoring reports for potable water, wastewater, ambient and point source air emissions. As a result, compliance with WBG environmental standards for these parameters could not be assessed. According to the company, the environmental authorities in Binh Dinh province monitor stack emissions of industrial operations only, and because of the recent construction of Duyen Hai 2 & 3, no monitoring has taken place. As a result, the compliance of the Duyen Hai facilities to government or WBG standards could not be assessed. IFC will require the company to provide monitoring reports for all parameters noted above for all facilities in advance of project financing, and to submit an action plan for achieving compliance. The company will also be required to establish a system of monitoring and reporting environmental emissions on a quarterly basis. - - Wastewater emissions: The company’s Khai Vy and Duyen Hai 1 plants draw potable and process water from municipal sources. Both facilities are equipped with wastewater treatment systems for process wastewater and general sanitary wastewater. Treated wastewater is discharged into municipal drains. Duyen Hai 2 & 3 draw water from tubewells within the plant boundary. Process and sanitary wastewater is treated and discharged into an open drain outside the plant boundary. As the Long My industrial zone is developed, a centralized drainage system will be established for all tenant facilities. - - Air emissions: All KVC plants draw gas and electricity from the municipal grids for manufacturing operations. Fuel oil is used to fire drying kiln boilers at all sawmills. Point source air emissions monitoring data from factory and saw mill boiler stacks were not available. - - Solid and hazardous waste: KVC maintains operational procedures for the management of solid and chemical waste derived from the production process. Wastes are segregated and stored for disposal in a designated area on the grounds of each factory for disposal by licensed contractors. - - Occupational health and safety conditions: The company has systems in place for maintaining occupational health and safety (OHS) in all units. Both permanent employees and contract workers are provided with Personal Protective Equipment (PPE) and training in equipment operation. Hazardous materials are managed by a dedicated staff trained in the storage, handling and disposal of such materials, and Material Safety Data Sheets are accessible in all workplaces where chemicals are used. Procedures are in place for handling workplace accidents. The limited education and transience of a large percentage of its workforce hampers the capacity of KVC’s management fully implement its OHS systems. Nonetheless, the company is dedicated to improving its OHS performance. At least one of its major customers has undertaken a labor and workplace safety audit of KVC’s facilities, and the company has demonstrated a capacity to respond quickly and comprehensively to specific issues raised in the audit. - - Life and fire safety standards: The company maintains standards of life and fire safety across all operations in accordance with Vietnamese requirements. Adequate numbers and types of fire fighting equipment are placed and clearly demarcated throughout all facilities. Water storage is also maintained at each facility for fire fighting purposes. Equipment is maintained and checked on a frequent and regular basis by dedicated staff within the Administration and Personnel Department as well as by government authorities every six months. Fire exits are marked but in a number of cases egress is obstructed. As with OHS, systems for management of life and fire safety exist and are implemented by the company in a manner consistent with Vietnamese requirements. - Labor relations: KVC employs approximately 1,700 people in its Khai Vy factory and 3,250 in all three of its Duyen Hai factories. Women make up nearly 45% of the entire labor force. Hiring practices, salaries, overtime rates and benefits are competitive and in full accordance with Vietnamese Labor Code. Approximately 40% of all employees belong to a government registered association that functions as a trade union, and there is no restriction of employees for membership. As with wood supply and OHS, a number of KVC’s customers audit the company’s labor practices. The company has demonstrated a willingness and capacity to correct any issues raised by these audits. Like many labor intensive industries in, KVC experiences a relatively high rate of employee turnover in the low-skill ranks (5-7% per year) due to the transience of the labor pool, which is drawn largely from the central and northern regions of the country. Approximately 80% of the Khai Vy factory labor force originates from outside the Ho Chi Minh City area. In attempt to reduce staff turnover, Khai Vy management provides travel allowances to non-resident employees enabling them to visit their homes at least once a year, and it is building a 5,000 m2 dormitory on site to provide subsidized housing to non-resident employees. IFC will require that employee housing meet all WBG life and fire safety requirements.

This ERS contains the full environmental and social documentation prepared for the project.

Based on its review of available information regarding potential environmental and social impacts and proposed mitigation measures, IFC concludes that the proposed project will meet all applicable World Bank Group policies and environmental, health and safety guidelines as well as Vietnamese government regulatory requirements.

IFC will monitor compliance with World Bank Group policies and guidelines requirements during the life of the project. The company will submit annual environmental monitoring reports. IFC will evaluate these monitoring reports and require the elaboration of remedial measures as needed to maintain compliance. IFC will also conduct periodic site reviews during project supervision.