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Financing the post-2015 agenda – the problematic role of development banks


This week sets a new milestone for the international community as the UN Security Council is preparing to vote on the new development agenda to replace the Millennium Development Goals. The draft agenda outlines 17 Sustainable Development Goals (SDGs) and over 160 sub-goals to gear development efforts over the next 15 years. While the previous MDGs have brought positive results in poverty reduction and access to education and healthcare, they have also been criticised for not addressing the drivers of growing inequalities and devastating environmental degradation. The SDGs, despite admitting to the importance of addressing such root causes, don’t seem to be taking any courageous steps in addressing structural injustices in the global economic system.

The implementation of the post-2015 agenda requires the mobilisations of massive resources estimated at around EUR 5 trillion per year. Traditional donors admitted to not being able to raise this sum, but international financial institutions jumped in, pledging to be in the front line for financing the new development agenda. They committed to mobilise over EUR 400 billion (pdf) in the first three years for the overly ambitious agenda of the Sustainable Development Goals (SDGs). The heavy involvement of IFIs who operate closely with the the private sector raises serious questions for civil society around the world on whether the post-2015 agenda will manage to address the root causes of inequality, poverty and environmental degradation.

The international agreement on the financing mechanisms for the post-2015 agenda, adopted at the Addis Ababa conference in July 2015, has been heavily criticized by civil society. Condemned as a commitment to privatise development the agreement shows an over-reliance on private finance (including the transfer of public Official Development Assistance (ODA) to the private sector); it fails to address tax injustice or to facilitate better oversight over public and private finance and the accountability of businesses; it is suspected to further increase the debt burdens of developing countries. The agreement confirms that some of the most fundamental flaws in the way development is financed remain unchanged.

International financial institutions (IFIs) seized the moment to confirm their importance in development finance. A group of IFIs, including the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Asian Development Bank (ADB) and the World Bank pledged to move from billions to trillions (pdf), a declaration rather scary considering the mixed legacy of IFI funded projects and their impacts on the environment and local communities. Their use of financial instruments such as global loans (pdf) to financial intermediaries (like private banks), public-private partnerships, blending (the use of aid money to subsidise or support public or private sector projects) does not succeed in prioritising poverty reduction, inequalities, vulnerable groups or environmental protection.

Global loans are put forward by IFIs such as the EIB to stimulate the development of small and medium enterprises (SMEs) through financial intermediaries including commercial banks. Research shows that they appear to provide greater stimulation to the intermediary banks, the first recipients of the loan that have little contractual obligations (pdf) as to where they spend the money and no penalty mechanisms for not delivering on their initial aim.

Public private partnerships (PPPs) are promoted as the main instrument for large infrastructure projects within the SDG agenda. For such high-risk projects, mobilising public funds to attract private investments also means transferring the risks to the public sector, that is to the taxpayers. The increased risk for public coffers is not something that is easily dealt with by less developed countries that suffer from weak governmental capacity and scarce public resources. In addition, PPPs and other blending instruments are disconnected from local needs and realities and do not include strong public participation, bypassing human rights and environmental sustainability.

Another concern associated with blended financial instruments is that rather than attracting private funds for public priorities, blending will increase the influence of the private investors and their interests over public resources. Even though evidence shows (pfd) a poor ownership by developing countries over such projects and financial interests often out-weighting development objectives, blending of ODA with loans from public or commercial banks has seen a steep increase from EUR 15 million in 2007 to EUR 490 million in 2012.

Furthermore, IFIs have serious deficits of transparency, public participation and accountability resulting from the policies of the institutions that govern the projects they are financing. The public information policies of major IFIs such as the EBRD overly prioritise commercial interests over transparency of information on environmental and social standards of the supported projects.

The experience with development finance by IFIs stands in stark contrast to the claim that the SDGs bring forward a people and planet centred approach.

Sustainable development is ultimately connected to empowering local communities and protecting the environment. It needs to be driven away from old paradigms of large-scale and heavily polluting projects as promoted by the current finance for development agenda. Comprehensive reviews and monitoring are required to assess the development effectiveness of the instruments put forward by international financial institutions for implementing SDGs, including:

  • monitoring their impact on poverty reduction, inequalities and environmental protection;
  • assessing the presence of strong social and environmental safeguards;
  • evaluating the alignment of projects with country development strategies including the presence of strong public participation;
  • evaluating the degree to which projects involve support to companies and intermediaries in and from the recipient countries.

Guest post: Italian mayors protest against the Trans Adriatic Pipeline


This guesst post was prepared in cooperation Counter Balance and Re:Common.

Though the summer sun wanes in the south of Italy, the debate over the future of the Trans Adriatic Pipeline (TAP) remains hot. During the Fiera del Levante, an annual business event in Bari, local mayors left the venue when the Undersecretary of State De Vincenti said that TAP is “a project that will cause no damage to the environment, and an opportunity to develop tourism and agriculture”. This is just the latest instance of discontent over the project.

TAP will run from Greece to Italy via Albania and is part of the Southern Gas Corridor, a series of three pipelines designed to bring gas from Azerbaijan to Italy for the European market. The project is among the top priorities of the EU’s energy security strategy but faces fierce opposition.

The project was given a green light by the Italian government in April 2015 in spite of opposition in the region, the province and numerous municipalities, including the municipality of Melendugno where the pipeline will enter Italian soil.

As the pipeline will cross dunes, pinewood, olive groves and state roads, local administrators and residents fear that it will impact the region’s essential tourism and agricultural sectors. Tensions were already high after local citizens and authorities were ignored by the Italian government during the environmental impact assessment process for the project in 2013 and 2014.

Following the authorisation of the project in 2014, the situation continued to deteriorate when the EIA was challenged in front of an administrative tribunal, with three proceedings now underway. In parallel, judicial authorities are investigating on alleged violations of national laws, adding complexity to the broader picture.

In May 2015, the mayor of Melendugno Marco Potì sent an open letter to the European institutions backing the project, including the European Commission, the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). The letter reflected the positions of local civil society organisations and 40 other mayors from the region who have voted for several motions opposing the project. So far the letter has not received a response.

A first loan of USD one billion was approved by the EBRD for Russian oil major Lukoil, one of the companies in charge for the development of the Shah Deniz II field in Azerbaijan that will supply the Southern Gas Corridor.

Civil society across Europe protested the loan, given the increased repression of media and human rights groups in the country, and urged the EBRD not to finance the project. The European Investment Bank is now in the running for the project, having announced in August 2015 that it would consider financing the Italian, Greek and Albanian sections of the TAP. The loan would be one of the largest in the history of the institution at EUR 2 billion.

The mayors who stood up against the project, as well as local citizens and NGOs, expect that the European Commission and the EIB listen to their concerns and ensure that the project adheres to the EU’s principles on human rights and the environment. Given the situation both in Italy and Azerbaijan, this will be a challenging task for these EU institutions to justify.

Slovenia and the Energy Union: clash in priorities, renewables as collateral damage


Tomislav Tkalec from Focus, Slovenia contributed to this blog post.

In a series of blog posts, Bankwatch campaigners and guests are weighing in on the implications that the EU Energy Union, as laid out by Vice-President Šefčovič, could have for each of the countries.

See earlier installations on our Energy Union section.

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As Maroš Šefčovič continues his Energy Union tour to discuss member states’ performances and their opportunities from the energy initiative, we have an interesting discovery from Slovenia.

The Commission’s assessment for Slovenia (pdf) from July holds no big surprises in that it advocates strongly for gas infrastructure, among others “the LNG terminal in Krk (Croatia) and several gas pipeline projects”. However, a leaked document outlining the Slovenian government’s priorities for an Energy Union reveals a stance that seems to collide with what Šefčovič has on offer.

The document dates from the beginning of this year. Similar to the non-papers from Germany and the UK and the Czech Republic, it was sent to Brussels by the Slovenian government before the Commission outlined its vision for an Energy Union in its February communication.

While the Commission’s outlook on energy efficiency overlaps with that of Slovenia – both stress the importance of energy efficiency and the need for financing instruments, the two don’t see eye to eye when it comes to security of supply.

The Slovenian government writes in its February non-paper:

“A functioning and fully integrated internal market, energy efficiency and the use of low-carbon domestic sources is the first and most important answer to increased security of supply in the EU. Any strategy on security of supply must go hand in hand with EU’s strategy on decarbonisation.”

The emphasis on decarbonisation sounds promising at first but is in fact a cheeky way of protecting Slovenia’s plans to prolong the lifetime of the Krško nuclear power plant from 2023 to 2043 and to build a new reactor there. (Slovenia is also hoping to develop a sandstone fracking project in Petišovci.) But the diversification of gas suppliers and routes, a top benefit for Slovenia according to the Commission’s assessment, are quite apparently not on top of the government’s wish list.

It also suggests opposition to the European Commission’s priority project, the Southern Gas Corridor (SGC). This becomes more distinct when the Slovenian government even suggests clear funding restrictions for the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD):

“One important aspect that needs to be addressed further within the Energy Union is the financing of big infrastructure projects (transport or energy wise) through European support institutions (EIB, EBRD). All projects, accessing to EU funding, should only be supported if they contribute to the long-term goal of GHG emissions reduction.”

The EBRD has already approved financial support for the Shah Deniz gas field that will supply the Southern Gas Corridor and the EIB is considering a EUR 2 billion loan for the Trans-adriatic Pipeline (TAP), a European stretch of the SGC. (And rather ironically, the two banks financed almost half of Slovenia’s economic and climate disgrace that is unit 6 at the Šostanj lignite power plant (TEŠ 6).)

The collateral damage of this clash in priorities is that neither the Slovenian government nor the European Commission acknowledge the potential for renewables. Between the two, the most likely scenario for Slovenia’s energy sector is one dominated by nuclear and gas. And while nuclear is technically a low-carbon energy source it would also be one of the worst options for a transition away from fossil fuels, loading huge burdens on a small country like Slovenia – be they related to nuclear fuel supply or waste – and increasing its energy insecurity.

Already now, renewables support schemes are being reduced in Slovenia and elsewhere. Since the feed-in tariff for photovoltaics was lowered in 2012 we have witnessed the downturn of the photovoltaic sector. Other new renewables projects are virtually non-existent.

The renewables potential will not be realised if financial incentives and priority projects are not aiming in the right direction. Sinking money into massive nuclear or fossil fuel infrastructure reduces the possibility to support decentralised, small-scale renewables installations that offer both more flexibility and more security.

Images and graphs: Large-scale agribusiness in Ukraine and local communities

Ukraine’s agriculture was the only sector in the country to grow in 2014. International investors like the European Bank for Reconstruction and Development are happy to point this out – and the role they are playing in financing these investments.

But an investigation published today into one of the main beneficiaries of loans from the EBRD and other multilateral development banks shows that cheap Ukrainian food products are coming at the expense of severe impacts on local communities.

In this blog post, before publishing some high-resolution images (see below) from the Vinnytsia poultry complex operated by Ukraine’s biggest poultry producer Myrinovsky Hlibproduct (MHP), we will offer some details on the size of public finance being provided to Ukraine’s agricultural sector and who the beneficiaries are.

Read more background:

Development banks, multinationals and offshore companies

Out of the total financing volume from the EBRD, IFC and EIB that we examined only 10% went in support of enterprises incorporated in Ukraine that are neither part of a multinational family group nor are linked with offshore companies.

Since 2009, three development finance institutions – the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC, the World Bank’s private finance arm) and the European Investment Bank (EIB) – provided about USD 1.4 billion in loans for Ukraine’s agricultural sector.

The biggest winners of this boom are industrial agricultural corporations, chief among them Myrinovsky Hlibproduct (MHP), a Ukrainian vertically integrated agricultural holding that controls about 60% of the country’s poultry production and has revenues of around USD 1.4 billion (2014). Ukraine’s fifth richest man and MHP founder Yuriy Kosyuk owns more than two-thirds of the company.

As one of the biggest players in Ukraine’s agricultural sector MHP has received more than half a billion dollars from the three institutions:

World Bank (IFC): USD 321 mln (five loans)
EBRD: USD 161 mln (two loans)
EIB: EUR 82 mln

The question, though, is whether not only agroholdings like MHP, but also the Ukrainian state benefit from these loans – something that is rather implied than proven when financiers promote these investments.


Source data available upon request.

Out of the total financing volume from the EBRD, IFC and EIB that we examined (2009-2015) only a meagre 10% went in support of enterprises incorporated in Ukraine that are neither part of a multinational family group nor are linked with offshore companies. The rest went to companies incorporated offshore (40%), subsidiaries of multinational companies (30%) and subsidiaries of offshore companies (20%).

Communities engulfed by massive poultry complex

The Vinnytsia poultry complex includes 12 rearing zones, a fodder plant and oil processing factory, hatcheries, a slaughterhouse, a water processing facility and manure storages. Each rearing zone contains about 1.5 million birds in 38 rearing houses.


A map of the Vinnytsia poultry complex indicating the scale of infrastructure that locals are facing.

All installations are concentrated north-west and south of Ladyzhyn. The small town of Mykhajlivka (top left) with about 1000 inhabitants is surrounded by five rearing zones between 2 and 4 kilometers away. Seven and a half million chickens in close vicinity and the associated movement of trucks, manure and live animals creates significant pressure on the local population and their environment.

The owner of the Vinnytsia complex, MHP plans to expand the complex to twice its current size. This has locals fear for their quality of life and many have reservations about leasing their land to the company.


Two rearing houses – Download in high resolution


The fodder factory of the Vinnytsia poultry complex stands just across the street from people’s homes who once lived only in green fields. – Download in high resolution

Manure management

Locals complain about the odour from the rearing zones and animal transports. A particular problem is manure which MHP applies to its own crop fields.

Our mission however noticed irregularities in several places.


A pile of manure next to a field where manure had already been applied. – Download in high resolution


Bones and feathers in the pile show that the manure is coming from the Vinnytsia poultry complex. – Download in high resolution


More sludge on open fields. – Download in high resolution


More sludge on open fields. – Download in high resolution


The manure storage of the Vinnytsia complex has only concrete walls as protection. – Download in high resolution


Download in high resolution

Pressure to lease land

Currently, agricultural land cannot be sold in Ukraine. MHP can, however, lease land for up to 49 years.

The total land bank of MHP accounts for around 380 000 ha of land around the country. But for its expansion plans the company requires vast fields of additional land especially in the region near Ladyzhyn.


A leaflet distributed among the villagers advertising the land lease and promising profits. – Download in high resolution

As locals told us, the company puts pressure on them to sign lease agreements.

People in Ulianivka and Bilousivla described how the company, failing to get agreement when approaching the community as a whole, systematically pressured land owners individually to sign the leases. People were approached individually up to four times. The most vulnerable people, usually elderly, single or widowed women, were targeted the most. Also families of MHP workers were being intimidated to sign the lease.

“We gathered together and decided against leasing our land. 410 people signed against, one was for construction. There are 50 people from the village who work for the company and they are putting pressure on these people’s families.”

“The company’s manner is rude, aggressive and brutal.”

The company does not want to engage

In preparation of our fact-finding mission and during our visit we experienced the non-cooperative attitude of MHP.

Non-governmental organisations, in particular the National Ecological Centre of Ukraine (NECU) was included in MHP’s Stakeholder Engagement Plan as stakeholders with whom the company should engage in communication.[*] Nonetheless MHP refused to speak to us during our visit.

Having been contacted by us several times, prior to our arrival MHP wrote us that employees will not meet or provide environmental information because

“… it will be difficult to find mutually beneficial points for future cooperation, therefore MHP representatives will not meet or provide information for CSOs [civil society organisations].”

During our visit, we were rather aggressively told by security personnel to leave from the company’s office near Ladyzhyn.

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The reports of Bankwatch and SOMO suggest that the problems with MHP and its Vinnytsia poultry farm are rooted not only in the company but also in the environment for agribusiness in Ukraine. MHP is one example how a company uses the opportunities provided by weak safeguards and low standards at national level, special taxation for agricultural enterprises, the international buzz around the country’s agricultural sector and the favourable financing that comes with it.

MHP, as many other businesses would in this situation, minimises costs and maximises profit, resulting in externalities for the local population affected by its operations. If anything, the involvement of multilateral development banks should help these pitfalls of doing business.


* The currently available version of the Stakeholder Engagement Plan (on MHP’s website) does not include NECU. A version from 2014 of which we have a hard copy does. We are not aware of the reasons for being removed from the document. A scan of the hard copy is available on request.

Slovakia and the Energy Union: Financing for fossil fuels


In a series of blog posts, Bankwatch campaigners and guests are weighing in on the implications that the EU Energy Union, as laid out by Vice-President Šefčovič, could have for each of the countries.

See earlier installations on the Czech Republic, Hungary, Latvia, Croatia and the Western Balkans and don’t miss the next posts.

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If there is one thing I have learned about strategies and long-term plans it is never to underestimate the ability to pay lip-service to a new priority while doing business as usual.

As part of his Energy Union tour, the European Union’s Vice-President for Energy Union Maroš Šefčovič visited his home country Slovakia in June. Sentimentality aside, the European Commission’s assessment and vision for Slovakia (pdf), while including some welcomed reference to renewables and energy efficiency, falls short of what is needed to transform the country’s energy sector towards a more intelligent, climate-friendly energy economy with the engagement of consumers.

As we have seen in other countries, when it comes to concrete projects in Slovakia the Energy Union proposals are so far to a much larger extent aiming at security of (gas) supply than they are at decarbonisation. The fact that Slovakia is one of the most vulnerable countries vis-a-vis Russian gas diplomacy is certainly an important factor. The proposals however do no justice to Slovakia’s potential for renewable energy and energy efficiency.

Energy efficiency

The document includes the formulaic statement we’ve seen for other central and eastern European countries that Slovakia is well on track to meeting its energy efficiency and decarbonisation targets for 2020. It does recognise, however, that „Slovakia still has the fifth highest energy intensity of the economy in the EU, with the industry having large potential for improvement“.

One could argue about the level of ambition of Slovakia’s energy savings targets when we have no problems reaching them even in a scenario that is almost business as usual. A look at graphs showing the development in Slovakia’s energy intensity suggests that the targets were a mere extrapolation of long-term trends in energy consumption (Energy Policy of the Slovak Republic [sk], see page 30). The energy savings so far result mostly from the continued transition of a post-communist economy.

Financing for … fossil fuels

Achievements of Friends of the Earth Slovakia offer good examples for how the development of local, self-sufficient energy systems could be supported. Improving conditions at a local and regional level to systematically invest into local solutions could greatly help renewable energy sources to find their way into the market. For this, Slovakia would need to re-think the distribution of competences and more importantly of financial resources.

The proposals included in Šefčovič’s assessment, however, do not heed these potentials.

Šefčovič proposes „significiant [financial] contributions“ for energy efficiency measures from the European Structural and Investment Funds and the European Fund for Strategic Investments (EFSI) among others. But looking at what has been proposed for EFSI funding, this is not much to hold on to. While refurbishments of residential buildings are few and far between, it is mostly projects of large companies that are proposed for support. It is not obvious to me why a funding scheme that relies on public guarantees should first target virtually riskless efficiency projects that safe corporation‘s costs, while households in central and eastern Europe struggle to set up and finance such measures.

The document also mentions the EU’s Projects of Common Interest (PCI) as a tool to spur market integration of renewables and regional cooperation among Member States. Projects chosen as PCIs are in line to receive preferential treatment and likely funding from European public facilities or bodies such as the Connecting Europe Facility or the European Investment Bank.

Yet, the list of potential PCIs for Slovakia does not include any projects that would help renewables to enter the market. There is for instance the oil pipeline Bratislava – Schwechat leading through one of the most prescious drinking water reservoirs supplying at least a third of the country. And another fossil fuel project that might become a Project of Common Interest is the Eastring gas pipeline which was presented as top priority [sk] during Šefčovičs visit in Bratislava. The project’s consortium is striving to get the pipeline into the new PCI list as soon as possible which would make it eligible for EU funding.

Other major energy projects that are being planned in Slovakia look no more promising. Both shale gas and conventional gas and oil fields are under exploration especially in the eastern part of the country and the construction of a new nuclear power plant is being negotiated between the government and Czech energy giant ČEZ. While these are alternatives to Russian gas (although Rosatom may get involved in the nuclear power plant), they are the opposite of a „wiser energy use while fighting climate change“.

Renewables

Feed-in tarrifs for photovoltaics were cancelled in Slovakia – for good reason. The first support scheme was set up in a way that benefited a rather narrow group of people and has led to a wide misuse of the scheme. Finding adequate ways to support solar power generation should be explored much more within the Energy Union proposals.

Very promising potential to provide Slovakia with a big proportion of baseload energy lies in geothermal energy. Yet it fails to attract the attention of Slovak and EU decision-makers.

The only largely accepted renewable energy sources in Slovakia are biomass and hydro energy. Biomass in the form of large forests is often seen as „green coal“. It is abundant, supported by state subsidies and EU funding but is weakly regulated which has lead to increasing threat (pdf [sk]) to our country’s forests. Also the state of our rivers is deteriorating as more and more hydro projects are permitted without proper impact assessments. (See for example this map [sk] of the Hron river with 42 small hydro powerplants in operation, under construction or planned.)

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Reading the Slovak country paper I found it hard to detect ambitious and structured elements of an energy transition. Instead, Energy Union looks like business as usual for the coming decades while paying lip service to the low carbon agenda.

[Campaign update] Romanian government support for controversial power plant project to be made public, EBRD loan cancelled

Bankwatch’s Romanian chapter has been granted access to environmental information included in a letter sent by Romania’s Ministry of Economy in support of a loan from the Euoprean Bank for Reconstruction and Development (EBRD) to Oltenia Energy Complex (OEC), Bucharest’s administrative court ruled yesterday.

The letter will shed light on the nature and extent of the government’s support for the project, and whether it was in line with EU regulations.

The EUR 200 million syndicated loan was intended for the rehabilitation and modernisation of unit 6 in OEC’s Turceni lignite-fired power plant, Romania’s largest and Europe’s second most polluting industrial facility in 2009. The support letter was mentioned in a Memorandum of Understanding signed between the Romanian Government and the EBRD in a July 2013 meeting.

Coal in the Balkans

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Earlier this week, Bankwatch had also learned that EBRD had officially cancelled the loan after suspending it in January, following Bankwatch’s repeated warnings about the numerous legal issues surrounding the planned restart of Turceni’s unit 6. Among them are failure to carry out a full environmental assessment and misclassification of the plant as an existing one, instead of a new one, that would allow higher pollution levels.

The court’s decision is final, and the Ministry of Energy, Small and Medium Enterprises and Business is now obliged to make public the letter which offered certain guarantees in order for the EBRD to consider the loan to OEC.

Cătălina Rădulescu, a lawyer and member of Bankwatch Romania explains the importance of the court’s decision: “This information will reveal what guarantees the Romanian government has pledged in order to get the EBRD loan, and whether they fall under the ‘incompatible state aid’, as defined by the EU’s legislation (Art. 107 of TFEU)”.

European regulations stipulate that state aid can only cover up to 85 percent of the loan.

OEC is a state-owned company, responsible for roughly 30 percent of the electricity supply in Romania. It operates the Turceni, Rovinari, Craiova and Ișalnița coal power plants, as well as several open-pit lignite mines.

The court ruling is undoubtedly a victory for transparency. But Turceni’s story is not over. The Ministry of Energy should see the cancellation of the EBRD loan, not as an incentive to locate alternative funding sources for greenwashing dirty coal operations, but rather as an opportunity to pursue other, more sustainable energy sources.