Alarm as controversial EBRD eyes up Middle Eastern investment opportunities

10 June 2011, The Ecologist

Before rushing to finance projects in Africa and the Middle East, the European Bank for Reconstruction and Development (EBRD) should address its environmental and social lending criteria, says Fidanka Bacheva-McGrath

The European Bank for Reconstruction and Development (EBRD) – created 20 years ago to promote the transition to market economies, democratisation and sustainable development in post-socialist countries – recently announced plans to expand its operations to North Africa and the Middle East.

But rather than rush to invest in a region in which it has scant expertise, the EBRD should instead reevaluate its past performance and make steps to seriously improve its environmental and social performance.

With 63 shareholders across 61 countries – including institutions like the European Commission and the European Investment Bank and some EU Member States, the United States, Australia and Russia, the EBRD currently operates in 29 countries across central and eastern Europe, central Asia and the Caucasus. It provides loans, equity investments and guarantees for private and public sector projects in the areas of finance, infrastructure, industry and commerce. In its 20 years of activity, the EBRD has lent around 60 billion euros.

The recent EBRD annual meetings in Astana, Kazakhstan, provided an opportune moment to reflect on the past performance of the EBRD and as well its future plans. The meetings began with complimentary remarks on the part of both the EBRD and Kazakh President Nazarbayev about the good cooperation between the EBRD and the central Asian country, and ended with the announcement that the bank would take on the role of supporting democratisation in North Africa and the Middle East.

Rising up Oz-like from the barren steppe, the city of Astana served as the backdrop: an impressive conglomerate of newly-constructed highways, skyscrapers and buildings designed by renowned architects like Sir Norman Foster, all constructed in the past three decades with oil revenues. Many observered that Astana is an apt metaphor for the type of development promoted in Kazakhstan by Nazarbayev and to which the EBRD is no stranger – a focus on oil and gas exports that drive unfettered and unsustainable growth.

The EBRD insists that in Kazakhstan it promotes ‘economic diversification and the move towards a more sustainable model of financial development.’ In March this year, the EBRD committed 50 million euros for a new initiative to support a renewable energy financial facility in the country. At the same time, such a token project is dwarfed by credits the EBRD is continuing to provide for the oil and gas industry in Kazakhstan. In 2010 and 2011, the bank provided funding to three new projects in the oil and gas sector – putting the bank’s support for the hydrocarbons sector between 2006 and 2011 at 123 million US dollars.

The new loans follow years of lending indirectly supporting the enormous Kashagan offshore oil field in the fragile north Caspian sea, fraught with environmental risks and negative social impacts. The EBRD has not directly financed the oil field, but it has repeatedly financed ‘support’ projects to Kashagan, contributing to the overall financial viability of the project, without directly bearing the responsibility for the activity at the field.

The EBRD’s energy lending to Kazakhstan is representative for the bank’s approach to the whole post-socialist region. The bank is indeed trying to support energy efficiency and renewable energy. A comendable trend is the bank’s increased energy efficiency lending since its Sustainable Energy Initiative was launched in 2006: at least 2 billion euros were lent between 2006 and 2009 to this field. But, overall, the bank’s lending for renewables pales in comparison with its support for oil and gas projects, and lending for fossil fuel projects has actually increased between 2006 and 2009.

In Mongolia, for example, the bank has so far made just one wind farm investment of around half a million euros, while it has lent 200 million US dollars for the development of the Ukhaa Hudag coal mine and coal washing plant (Ukhaa Hudag is a part of the Tavan Tolgoi coal deposit, one of the largest in the world). While the EBRD says such investments are justifiable because they stimulate the business sector, a public bank should not use its scarce resources to help companies extract coal more efficiently for sale to China.

The EBRD’s history is replete with examples of questionable investments: the bank has in the past lent support to the Baku-Tblisi-Ceyhan (BTC) pipeline, the Kumtor gold mine in Kyrgyzstan, ArcelorMittal operations in Kazakhstan, Ukraine and Bosnia and Herzegovina, and most recently to the Sostanj lignite plant in Slovenia. To its merit, the bank has withdrawn already from many investments with disastrous consequences on the environment and surrounded by human rights abuses, such as the Sakhalin II project in the Russian Far East or the Moskow-Skt. Petersburg highway passing through Moscow’s last remaining forest – Khimki. But its involvement with such projects is indicative of the dangers of the bank’s main approach: support the development of the business sector first and foremost, in the hope that it will drive both development and environmental sustainability.

With all these controversies behind it, in Astana, the EBRD was nevertheless relentless in promoting the same vision of development as in the past. Asked by a journalist during a press conference what he understands by development, EBRD President Tomas Mirrow said, ‘Our main focus is certainly on developing the market economy because we are convinced that the market economy serves the cause of people best (…) For us, development first and foremost relates to developing a sound economic environment in which companies and municipalities can develop well and thus benefit ordinary people.’

But is this vision of development enough — for post-socialist countries and for North Africa and the Middle East? The bank’s patchy record on energy lending is a clear indication that its vision of sustainable development is far from coherent. It has, in the past, lent disproportionately more to fossil fuel projects than to other economic sectors in countries in central Asia – is this sure to alleviate poverty and promote democracy? The bank has yet to develop indicators to measure the impacts of its investments on poverty reduction. Such a track record makes the bank a doubtful candidate to support sustainable development in countries in North Africa and the Middle East, whose revolutions were also for social equality — and many of which are energy rich. The EBRD and its political supporters should pace themselves and reevaluate the bank’s approach to development before expanding its geographical reach.