Blog entry

European Parliament criticises Serbia’s lack of progress on renewables

If you’re in Serbia, you’d hear that the country can both enter the EU and keep up with its over-reliance on coal. Everyone says so. But that this is not true was just confirmed by the European Parliament.

In January, the Parliament adopted a resolution in which it assesses the progress made by Serbia towards EU integration during 2013.

The resolution text specifically says:

“[The European Parliament] regrets the lack of progress and continuing delays in the practical implementation of the renewable energy framework; notes that Serbia lags behind other applicant countries in the utilisation of renewable energy sources and expresses concern that Serbia’s 2020 renewable energy targets will not be met; emphasises the need for transparency in government consultation processes” (art. 42)

„Considers it regrettable that too little progress has been made in the areas of the environment and climate change and calls on the Serbian authorities to adopt a comprehensive climate strategy in line with EU targets as quickly as possible” (art. 43)

A lot of Serbian media, naturally interested in Serbia’s progress towards EU membership, covered this resolution and a press release by Bankwatch member group CEKOR notified Serbian audiences about it (the government, of course, did not rush to inform its citizens about this assessment).

Seeing this coverage, one could imagine that Serbian authorities might indulge in a bit of self-reflection. The signal sent by the European Parliament is a strong one and it’s one that will matter in Serbia’s path towards EU membership. You might imagine Serbian authorities would come out saying they would immediately get to work to implement the renewable energy framework or the comprehensive climate strategy that the Parliament says is missing. But you’d be naïve.

Instead of focusing on the issue at hand, the Serbian government decided to shoot at the messenger. The Serbian Ministry of Energy issued its own press statement in which it said that CEKOR does not have that much to say on the country’s energy mix. They wrote (own translation):

“Neither CEKOR nor any other organisation can have the role of absolute arbiter on this topic. It remains the exclusive authority of state institutions to approach this topic with maximum attention.”

But this is just what CEKOR wants, that the government acts with maximum responsibility on the future of our energy system. Yet, in the midst of preparations for early general elections (scheduled to take place on March 16), we are not surprised to see that our government is more interested in making scapegoats out of us than in addressing the real issue at hand, namely what the best energy mix for Serbia is.

But in good faith we would like to say to our authorities that, no matter what they say to national media today, the European Parliament and other EU institutions will be there watching Serbia at the end of the road. The EU has climate targets which it will narrow even further. It will not allow a lignite fuelled Serbia to compromise them.

And, no matter what our authorities tell the media today, the real issue is that coal burnt in Serbia causes 2,000 deaths annually and costs up to 5.2 billion euros annually in healthcare expenditures (Source: HEAL). Serbia has cheaper, healthier options, and those options are in line with our European route.

New EBRD policy too weak on tax havens in development finance

Cross-posted with permission from Eurodad’s blog

It nearly got buried during the holiday season. But, in the last working week of 2013, the board of the European Bank for Reconstruction and Development (EBRD) approved a new policy that could have far-reaching implications. This new policy is on where the bank’s clients can be ‘domiciled’ – officially located in legal terms. In plain language, should the private companies who make up most of the bank’s portfolio use ‘third jurisdictions’ – or tax havens – as their legal locations, even if they do little actual business there.

The EBRD is a multilateral development bank established in the early nineties to invest in the development of Eastern Europe and Central Asia. In the run-up to this long-awaited policy reform, some civil society groups were calling on the bank (pdf) to lead by example when structuring investments in development projects. A public bank such as the EBRD should be the first to seize this momentum to ask its clients – the beneficiaries of publically backed loans – for higher accountability standards, and more transparent access to data about economic operations and taxes paid and contributions to societies in the countries where they are registered.

Development banks rely heavily on tax havens

Previous research by Eurodad and member organisations (pdf) has clearly demonstrated how development finance institutions (DFIs) – publicly backed banks such as the EBRD that lend to the private sector – prefer to structure investments through intermediaries based in ‘secrecy jurisdictions’ such as the Cayman Islands, Mauritius and the Bahamas. This is no different in the case of the EBRD. In 2012, the bank’s investments in equity firms and other financial intermediaries accounted for 32% of its business volume. Nearly all the equity funds were domiciled in notorious secrecy jurisdictions such as the Cayman Islands, Jersey, Guernsey and Luxembourg.

The problem with tax havens

DFIs often claim that tax havens are useful and necessary because of solid, experienced and efficient legal, judicial and advisory structures that are conducive for investment. However, there are a number of reasons why DFIs’ use of tax havens is detrimental for developing countries. Tax havens contribute to the loss of much-needed tax revenues by developing countries, lower growth in poor countries and, because of their secrecy, encourage money laundering and tax evasion.

This has a dramatic impact on developing countries, not least since tax revenues are the main source of funds for public services – including schools, hospitals and clinics, water and sanitation and social protection. Moreover, tax havens have a disruptive impact on markets, preventing the creation of a level playing field among various types of businesses. Small- and medium-sized enterprises operating in domestic markets – the backbone of many economies and a major source of employment – are particularly disadvantaged. They do not have the means to hire professionals to create artificial corporate structures and engage in aggressive tax planning, as larger multinational corporations can.

Sound business practices?

The EBRD’s new policy, adopted on 17 December 2013 but made public only in January, prevents the bank from investing through tax havens unless it is for ‘sound business’ reasons. Curiously, tax planning is recognised as a sound business reason, on the condition that it does not lead to the “total or near total elimination of taxation”. This replicates the language of the OECD/G20 project on base erosion and profit shifting (BEPS). However, the policy does not specify what would constitute an allowable erosion of the tax base or assess the potential consequences of this.

Eurodad believes that public money used to back a public bank such as the EBRD should not be used to legitimise the use of tax havens, as their detrimental role in development has been clearly demonstrated. For every dollar developing countries receive in aid, over six dollars leave as illicit financial flows that are often facilitated by tax havens. Losses in tax revenue for developing countries are as much as USD 160 billion every year (pdf), money that cannot be used for much-needed investments in schools, hospitals and public transport.

A new era dawning on tax havens?

The EBRD initiative follows a number of policy revisions by other key institutions regarding the use of tax havens – including the European Investment Bank (EIB) in 2010, the World Bank’s International Finance Corporation (IFC) in late 2011, and DFIs in countries such as Sweden. All these proposals are largely built upon the results of the Organisation for Economic Co-operation and Development (OECD) Global Forum peer-review process. Civil society groups are now calling for much more ambitious policy changes by different development banks.

Following the IFC and Swedish proposal, the EBRD will not provide financing to projects associated with jurisdictions that do not comply with the internationally agreed tax standards set by the OECD’s Global Forum. However, this regime has been widely criticised for judging jurisdictions too leniently for political reasons, and for basing itself on international standards that are flawed and incomplete.

According to the most recent OECD ratings (pdf), the EBRD would still be able to structure investments in well known tax havens such as the Cayman Islands, Mauritius, Guernsey and Jersey. Despite the flaws in this list and the process of compiling it, the new policy would exclude other tax havens such as Luxembourg and Switzerland, both of which are frequently used by the bank.

More ambitious approach is needed

This OECD-based approach contrasts with the more stringent regulation imposed by the Belgian government on its DFI, known as BIO. Following a critical report (pdf) of Eurodad member 11.11.11, BIO will no longer be able to invest in companies or investment funds that do not sufficiently apply the OECD standard or maintain an average corporate tax rate of less than 10%.

The EBRD has missed an opportunity to take bolder steps towards preventing public money from being derailed through tax havens. The bank has also failed to go beyond the flawed international standards that are not currently, even if implemented, ensuring effective taxation of multinational corporations. In a cogent submission, the Bankwatch network of European civil society groups that acts as a watchdog of the EBRD set out sensible recommendations for what a real pro-development policy on offshore financial centres should be, including:

Requirements for full transparency from clients, including public disclosure of the ‘beneficial’ or real owners and country-by-country reporting of sales, assets, employees, profits and tax payments.
A ban on using offshore financial centres (OFCs) unless the project is in the OFC or has a substantial part of its operations there.

It is time for DFIs such as the EBRD to lead by example and impose strict policies that do not support the use of tax havens as a ‘sound business practice’, and instead help tackle the global tax dodging industry that robs developing countries of hundreds of billions of dollars every year.

Charts: The two worlds of EIB climate action

After the European Investment Bank announced tight restrictions to its coal lending last year, we still have to wait several months to assess the bank’s lending against the background of its new energy policy. But also the latest available figures for the EIB’s energy and climate action lending from 2012 provide valuable insights into the challenges that lie ahead of the bank, specifically with a view on renewables and climate action, now that coal is out of the picture.

At today’s annual meeting between the EIB’s Board of Directors and civil society representatives, Bankwatch colleagues among others discuss data from the EIB’s lending statistics. Below are a few snapshots of our findings. (For absolute lending figures see the corresponding tables in our briefing paper.)

Energy lending

The EIB’s lending to renewable energy dropped along with total energy lending (EUR 12.7bn down to EUR 8.4bn). While this in itself cannot be taken as a trend, the charts below show how it nonetheless exacerbates the imbalance between old and new EU Member States, with the latter receiving only a meagre EUR 65 million (or 3.1 percent of renewables lending within the EU) compared to the EUR 2 billion in EU15 countries.

Climate action lending

A similar asymmetry can be found in the EIB’s climate action lending (which includes also non-energy lending, most notably to transport and waste projects).

The EIB’s aim is to invest 25 percent of its portfolio in climate action. But while in the EU15 it has already surpassed this threshold, the EU12 are missing out on the potential to renovate and upgrade their infrastructure. More specifically, if it wasn’t for Poland, the EIB’s climate action lending in new EU member states would constitute only 6.4 percent of total lending – a far cry from the bank’s ambitions.

Guest post: A Balkan lesson for coal investors

Cross-posted from Justin Guay’s Huffington Post blog. Co-authored by Bob Burton, Coalswarm and Sven Haertig-Tokarz, Bankwatch.

For the last few weeks political controversy has raged in the central European nation of Slovenia over the unfolding financial disaster associated with a new 600 megawatt coal-fired unit at the existing Sostanj power station. For the past three years the project has grabbed the public’s attention, but just last week an emergency session of parliament was convened with parliamentarians demanding answers on how the cost of the project — referred to as Unit 6 — has doubled to $2 billion (€1.44 billion) since it was first proposed in 2006.

When Unit 6 was first being considered the government-owned utility Termoelektrarna Sostanj (TES) was proclaiming that the project would be clean and cheap. But the early warning signs were there. The environmental impact statement on the project was supposed to consider alternatives but didn’t. Energy efficiency and renewables were ignored altogether even though Unit 6 would be based on burning lignite — the dirtiest and most greenhouse gas intensive form of coal. Indeed, the project is projected to be so polluting that it will also almost swallow Slovenia’s entire carbon budget under European Union climate objectives for 2050.

When in October 2006 the Ministry of Energy first announced the project it was claimed that it would cost $820 (€600 million). Less than a year later they upped the figure to $1.07 billion (€780m). Two years later the price tag was revised up again this time to $1.5 billion (€1.1 billion) and more recently came in just shy of $2 billion (€1.44 billion). Cheap coal power indeed.

Back in 2010 Slovenian civil society groups had warned that the project’s cost estimates were dodgy and likely to result in major losses and cross-subsides. But international investors — the European Bank for Reconstruction and Development and the European Investment Bank — were quick to approve loans of altogether $890 million (€650 million) plus $136 million (€100 million) syndicated to commercial banks. However, a state guarantee, required for the biggest chunk of the loans and thus a prerequisite for the project to go ahead, hinged on conditions that were unrealistic: project costs of not more than $1.78 billion (€1.3 billion) and a lignite price not higher than $3 (€2.25) per gigajoule.

Now Slovenian media reports the project is likely to run at an annual loss of approximately US$69 million (€50m) a year if completed in 2015, potentially leaving Slovenian taxpayers to pick up the losses. And controversy remains over the corruption allegations — still subject to an investigation by the European Anti-Fraud Office (OLAF) — surrounding how TES awarded the contract for the project to the French engineering company Alstom.

While the Slovenian government initially extolled the financial benefits of the project, it is now glumly resigned to throwing good money after bad. The Slovenian Prime Minister, Alenka Bratusek, recently stated that despite the cost escalation “we don’t have the privilege to decide whether this project can still be stopped. The data we have show halting it would be more expensive than completion.”

The Sostanj saga should be a humbling lesson in the heavy costs that come with a starry-eyed pursuit of the ‘clean and cheap’ fairytale the coal industry has sold policymakers. The crippling costs of Sostanj would be bad enough if Slovenia was the only country embracing a new coal plant but it isn’t.

Most governments in south-eastern Europe are planning new coal-fired power plants, claiming they would be the cheapest option to secure energy supply. Among these plans is a project in Kosovo eerily similar to the ill-fated Sostanj power station. The Kosovo project too is proposed to be a 600 megawatt plant based on lignite and, it too comes with a price-tag of $2 billion.

Even though both the World Bank and the European Bank for Reconstruction and Development (EBRD) last year adopted new lending policies introducing stricter conditions for their coal lending, both are contemplating supporting the costly and polluting Kosovo project. In fact the World Bank is now preparing a scoping document for an Environmental and Social Impact Assessment that would pave the way for support. Worse, it’s preparing the assessment while keeping the Request For Proposals (RFP) secret (which helps to avoid disclosing the increase in tariff needed to support the project). Their rash and reckless moves to support the Kosovo coal plant has made it the test case for Dr. Kim, and the World bank when it comes to how seriously they take these coal finance restrictions.

It’s telling that in a move potentially made to justify World Bank involvement Dr. Kim has warned that people would ‘freeze to death’ if a new coal plant weren’t built. An embarrassing statement that will no doubt come back to haunt him. Which is in fact exactly how one official at the European Investment Bank (EIB) described the backlash to their support for the Sostanj project.

As Dr. Kim and the World Bank prepare for the Kosovo project there is one question that Kosovars should be asking: Is the World Bank willing to pay for the costs of the inevitable overrun, or like the Slovenians, will the citizens of Kosovo be stuck with the check?

Trains, planes and citizens’ mobility – Axeing of Polish airport plan brings calls for improved train connections via EU funds

On January 14, the regional government of Podlaskie (eastern Poland) announced that it would be dropping its plan to build a new regional airport that was to have involved 80 million euro support from the European Regional Development Fund.

The Podlaskie decision comes after many years of preparation for the airport project, which had been promoted by the regional authorities in spite of its questionable rationale.

Indeed plans to finance the airport via the EU funds in the previous 2007-2013 period failed to materialise mainly due to the fact that the airport was planned in a location that would have endangered the wildlife of the Biebrza and Narew river valleys that are protected as national parks. Following this failure, the regional authority pressed on with a determination to finance the investment in the upcoming EU budgetary period, and a new location – in Topolany – was chosen in line with the results of a new environmental impact assessment.

However, as preparations for the 2014-2020 budgetary period gathered pace, questions have increasingly been raised about the rationale to build new regional airports in Europe, in particular when public money support is involved.

Bankwatch contributed to this discussion with the publication of a report in 2012 that highlighted the financial burden caused by the operation of such regional airports on regional budgets, as well as the practice of subsidising air connections in order to attract any traffic. Indeed, even Europe’s Budget Commissioner, Janusz Lewandowski, has expressed doubts about the need to build further airports in Poland given the current low traffic figures.

Importantly, last week’s announcement from the regional authority confirmed that the municipalities, businesses and citizens of Podlaskie themselves have been questioning the need to build an airport for the region, as reflected by the results of public consultations for the Regional Operational Programme 2014-2020. It seems that other tranpsort modes, and in particular the rehabilitation of existing railway connections within the region and with Warsaw, would bring greater benefits to the regional economy and the mobility of Podlaskie’s inhabitants.

Following this recent breakthrough, Polish Green Network and Bankwatch are stepping up calls for faster implementation of rail upgrade projects by the national government in order to better connect the Podlasie region with the rest of the country, including Warsaw and its two operating airports.

Particular focus, we feel, now needs to be placed on the Rail Baltica that would connect Warsaw with Białystok and then the Baltic countries. The plans are there, EU financial support is available, yet the project failed to materialise in the current budgetary period as only a very short section of the route next to Warsaw is currently being upgraded. Implementation of the Rail Baltica project should now take off as quickly as possible with 2014-2020 EU money.

[Campaign update*] New legal complaint on Plomin C

Zelena akcija/Friends of the Earth Croatia has submitted a complaint to the Croatian Constitutional Court as part of its ongoing campaign to prevent the construction of the Plomin C power plant, which would be run on imported coal.

The complaint challenges the verdict of the Administrative Court in Rijeka, which in October rejected Zelena akcija’s previous complaint, that sought to overturn the project’s environmental permit. In the new complaint, Zelena akcija argues that the Administrative Court should not have ignored the fact that the project is in contradiction with the Istria County Spatial Plan.

More specifically, it is legally defined that the Environmental Impact Assessment process should be carried out for projects that are in line with spatial plans. Therefore, Zelena akcija argues that the court ought to have examined the issue of Plomin C’s incompliance with this document. In addition, Zelena akcija argues that the court de facto curtailed its right to appeal against the issuing of the permit by failing to systematically consider its arguments.