Blog entry

The two sides of reality – what the BTC pipeline means for the EBRD in north Africa

As the European Bank for Reconstruction and Development prepares to expand its portfolio to countries in the southern and eastern Mediterranean (SEMED) region, the move has been met with scepticism, to put it mildly, from groups on the ground. So it’s not surprising that the bank has been sounding the drums of its merits a bit louder these days, notably with this website dedicated to “careers in the southern and eastern Mediterranean”.

The website tries to demonstrate why the EBRD has the necessary experience to help the people in Morocco, Egypt and Tunisia, and at times, the self-promotion borders on the romantic – ‘we’ve made cities shine brighter’ – with the EBRD asserting:

“We also promote sustainable development in everything we do, making us the only international financial institution with such a determined approach to the environment.”

and:

“Put together, our portfolio has provided us with a wealth of experience that we plan to adapt to meet the needs of the SEMED region.”

And for some reason unknown, the EBRD repeatedly invokes the Baku-Tbilisi-Ceyhan (BTC) oil pipeline across Azerbaijan, Georgia and Turkey as its model development project that proves its ‘wealth of experience’ ‘promoting sustainable development’.

It’s certainly an interesting choice, because while the project did indeed have a powerful effect on people’s lives, it’s not quite the one that the EBRD suggests.

Human rights and authoritarian regimes

From the beginning the BTC project was touted as a ‘world class model development project‘, and BP, the project sponsor, agreed to standards set by the OECD and the US and UK government’s principles on human rights (pdf).

Yet criticising the BTC pipeline wasn’t tolerated in the three countries involved – critics were intimidated and even tortured and arrested as in Turkey, where villagers protecting their land were beaten and hospitalised by riot police. Journalists were arrested also in Azerbaijan.

In 2011, the UK government announced that the BTC Company had broken the commitments it had made to international human rights responsibilities.

This should at least raise considerable doubts about the due diligence of international financial institutions, including the EBRD, on this project. But hailing the BTC pipeline as an exemplary success for the SEMED region is at best tactless.

Employment

The promises about employment opportunities and improved welfare, the same ones we see today being made for the SEMED region, never materialised for ordinary people in the case of the BTC project.

While the average oil worker in Azerbaijan still earns only about USD 440 per month, the BTC pipeline increased the wealth and stronghold of Aliyev over the Azeri people. In transit countries only a few jobs went to local residents, most of which were low-skilled, short-term, and poorly paid with improper arrangements on days off. BTC labour practices led to a number of strikes and the creation of the Union of BTC workers in Georgia

Women in particular were affected by the BTC project. As Bankwatch’s study ‘Boom time blues’ shows, the project led to increased prostitution and trafficking along the pipeline, new health problems and worsening socio-economic conditions.

It’s worth pausing here for a moment, because human rights, employment and gender issues are pivotal elements when you want to support the people in Egypt, Morocco and Tunisia in what they’ve been calling for so powerfully during the Arab Spring.

If the BTC pipeline project is a harbinger of things to come, then responses like the one from Egypt are well justified. If these are the outcomes awaiting the people in SEMED, they will no doubt be back on the streets in protest when the EBRD promises:

“The impact on the Azerbaijani economy has been huge and, while it’s unlikely that the SEMED will require a 1,768km oil pipeline, we plan to replicate success on this scale throughout the region.” (emphasis added)

Land and income

Local landowners along the route were often unsuccessful in trying to protect their land or receiving adequate compensation for lost land, both in local courts and through the complaints mechanisms of the international financial institutions.

The village of Tsemi in Georgia lost its main source of income from tourism because the project sponsor BP polluted the village’s water source. But even then the compensation and clean up measures that BP was obliged to didn’t ensure clean and safe water for the village.

Protected areas and cultural heritage

The EBRD writes on its SEMED website about the BTC project

“The environmental and social documents were also extensive. Produced in English, Russian, Azeri, Georgian and Turkish, when stacked up they reached over five metres in height.”

Indeed the project produces a lot of paper work, but this wasn’t enough to address the concerns of the project’s critics. The pipeline passes though sensitive natural areas, including national parks, Ramsar sites and aquifers that provide drinking water.

The Baku Ceyhan Campaign that I was involved with did a detailed environmental impact assessment for the Turkish section of the pipeline and found 173 violations of international standards, including World Bank policies.

In 2010 following a complaint to the U.S. government, the Overseas Private Investment Corporation, another project investor, recommended that BP needed more precautions to safeguard the pipeline (pdf) and “to comply with the applicable environmental and social policies and guidelines of the lenders […] and with national law.”

In spite of all the well-documented shortcomings of the BTC pipeline, especially with regards to benefits for local people, the EBRD still considers it a success story. It’s as if the bank speaks of an entirely different project.

The lack of humility on display here makes me wonder how the mistakes of BTC can be avoided and how the people of Egypt, Morocco and Tunisia are supposed to benefit from the activities of an institution like the EBRD.

Infrastructure in the developing world: does it need PPPs?

For our latest issue of our quarterly newsletter Bankwatch Mail, we invited two specialists, Matt Bull of the World Bank’s Public Private Infrastructure Advisory Facility and David Price of the Centre for Primary Care and Public Health, Queen Mary, University of London, to debate the issue of public-private partnerships (PPPs) in the developing world. Here’s an excerpt from their discussion. Read their full exchange here.

Matt Bull:

Firstly, to kick things off, I think we need to address why development institutions such as the World Bank are engaging in PPP projects. The primary reason is that there is a very large infrastructure funding requirement in the developing world that cannot solely be met through constrained government and Overseas Development Aid (ODA) budgets. Let me explain further.

In developed economies, the debate on whether to engage private sector capital in the delivery of infrastructure primarily revolves around whether the assets should be privately financed or publicly funded with the direction of the debate hinging on how you value the risk transfer benefits of private finance relative to its costs. However, in developing economies, there is often no such luxury, governments often do not have the option of publicly funding their infrastructure because their fiscal positions are weak, there is little or no sovereign bond market for them to raise public finance and the ODA funding available is finite and must be shared amongst numerous ‘competing’ recipients.

As a result, governments find it difficult to genuinely ‘invest’ in their economy and instead often choose to offer the private sector the ‘rights’ to develop the assets on their behalf and in doing so are inviting the private sector to share in (or assume) the risks and rewards of the venture. They do this because the counter-factual is sub-optimal – i.e. without the private participation the asset may never be delivered or may come at such a high opportunity cost (e.g. reduced spending on other priorities) that to do so would be detrimental both socially and economically. Put simply, private risk capital is in some circumstances the only viable funding source.

I think this is important context because the World Bank and other multilaterals are not necessarily pursuing PPPs along ideological lines but instead are viewing them as a necessary part of the funding mix if infrastructure is to be developed and economic and social benefits realised.

This is a very different situation for example to the UK’s Private Finance Initiative where there are clearly alternative procurement and funding arrangements other than PFI. So to start the debate I want to set it off on the trajectory of the developing world and not get caught up in some of the arguments that have greater relevance and validity to the developed world.

Of course, PPPs of any sort are a delicate transaction and they have to be done carefully so that the infrastructure is efficiently delivered and value for money achieved. I can go into some of the safeguards necessary to achieve this but will give David a chance to respond first.

David Price:

Let me start with Matt’s key argument that whereas developed countries can choose among various financing methods, in developing economies PPPs are an economic necessity. He writes: “private risk capital is in some circumstances the only viable funding source.” The there-is-no-alternative claim has been used repeatedly to support PPPs in the UK. Ministers have insisted that investment would not take place except through PPPs and almost all new hospitals built in the last ten years have been delivered through private finance. Several of these hospitals are now in huge debt because of PPP and only three weeks ago the government had to announce a GBP 1.7 billion bail-out for seven of them.

But familiar as the argument of necessity is, I am struck by the World Bank’s reliance on it. After all, it was the World Bank which pointed out that from the public debt angle the UK government’s private finance initiative (our special variant on the PPP model) was essentially an accounting trick used to get round debt level targets. PPP debt is still public debt only it doesn’t register in the same way as straight public financing.

It’s important to be clear about this: PPP is debt underpinned by public guarantees and ultimately paid back from public funds and user charges sometimes enforced by government. If that is the case, how can it be claimed that PPP is a necessity and public financing an impossibility in developing economies?

If PPP is a policy choice and not an act of God we need to know more before we can assess the grounds for multilateral agency support for the policy. Specifically, what are these circumstances in which private risk capital is the only viable alternative? Or to put this another way, what causes of developing counties’ “weak fiscal position” has the World Bank determined can only be addressed by increased reliance on private equity and in no other way?

And the answer is important because there is nothing self-evidently “developmental” about the private risk capital option. On the contrary, there are known development costs. The PPP option places enormous financial burdens on governments and users of essential services. In the interests of the PPP industry, it cultivates larger rather than smaller schemes. It exposes poorer countries to financial market risks in ways in which they have not been exposed before. It is associated in the water sector with serious social, political and operational problems and with huge price hikes and burgeoning operating expenses.

So the policy is contentious and we need to hear more than that it is unavoidable.

…

Read on in Bankwatch Mail 51

Poland rejects EU money for jobs and energy independence at Environment Council

As if Poland hadn’t loaded – enough – shame on itself, it just dealt out another unilateral blow to more ambitious climate targets for the EU:

At today’s crucial Council of Environmental Ministers, Warsaw blocked the European Commission’s EU Roadmap 2050 and intermediary emission reduction targets to make the long-term goal of reducing emissions by at least 80 percent by 2050 possible. (All other EU environment ministers agreed to the roadmap.)

It’s hard to measure the mounting frustration that I share with other Polish environmentalists. Seeing how our government with one careless stroke destroys months of hard work by the Commission and others at EU level. Even more – our government’s move shows how little it understands about the benefits that getting behind the EU low-carbon strategy can have for its people.

The proposed text that Poland vetoed today proposed that 20 percent of the next EU Budget should be dedicated to climate mainstreaming. With the next EU Budget counting over one trillion euros, Poland has said no to a huge amount of money – money that could be used for energy efficiency and savings, that translates into more heat comfort and financial savings for Polish families, jobs in the green energy sector, a lower energy budget for the country as well as more energy independence.

Instead, our government remains in the grip of the coal lobby and presents this as the only alternative for the country. Oh, and in the process it’s also messing up the chances for a greener future for all European citizens.

Thank you very much, indeed!

Two days before today’s Environment Council, over 20 Polish NGOs sent a letter to our prime minister Donald Tusk (pdf). In it, you can read more on the negative consequences for Poland resulting from its resistance as well as on the great benefits that could accrue to us if our government wisened up.

Ukraine’s risky nuclear future shouldn’t receive European support

On Monday it will be one year after the nuclear accident at Fukushima, an accident that gripped the attention of the whole world for several months. It also triggered profound political decisions: Germany has since made the final decision on its nuclear energy phase out, and the EU agreed on stress tests for all its nuclear power plants.

All that seemed to have bypassed the government of Ukraine, the country that has seen the only other Level 7 nuclear catastrophe: Chernobyl.

Ukraine has 15 Soviet-era nuclear reactors in operation, with 12 of them designed to finish operations before 2020. But instead of shutting them down – the safest option to avoid accidents – and giving renewable energy sources and energy efficiency measures a chance, Ukraine is planning to expand the lifetime of all its nuclear reactors. (In fact, two that were supposed to be taken off the grid in 2010 and 2011 respectively have already seen their licenses extended by another 20 years.)

Interestingly, after the Fukushima accident Ukraine has agreed to carry out stress tests for its reactors, but it continues with the expansion plans without the final results having been published in an EU report.

Now all that might still be of little surprise. Ukraine has seen its share of curiosities in the past. What might come as a surprise though is that two European institutions, Euratom and the European Bank for Reconstruction and Development, are considering financing a project that would make them directly support the lifetime expansions.

The „Safety Upgrade Project” (SUP), worth a whopping 1.45 billion euros, envisages the modernisation of the 15 reactors by 2017 and could be financed with up to 800 million euros. But there are a couple of problematic points:

Euratom and the EBRD claim that they would be supporting the safety modernisation of the reactors, but an expert study that we’ve published yesterday shows that some of the measures included in the project are necessary for the lifetime expansion of the plants and not for their regular functioning until the initially planned term.
The project has also seen an inadequate environmental assessment: Particularly after the accident in Fukushima and considering the outstanding stress tests, the project should clearly require a full Strategic Environmental Assessment (SEA). But the EBRD agreed on (and funded) only a much narrower Ecological Assessment.
Finally, and particularly worrying is that these plans go ahead in total secrecy:

A law that included public and local authorities in the decision on the lifetime expansions has been changed in 2009, one year before the first reactor should have expired. Today, the nuclear lifetime expansions go ahead with no public discussion whatsoever is in Ukraine.
International legislation such as the Aarhus Convention would require neighbouring countries and the European public to be informed about Ukraine’s plans. But as our study shows, no information on the safety upgrades was provided outside of Ukraine.

All this is very relevant for the EU, not only because it’s in its neighbourhood, but because these are the same reactors that would produce electricity to be exported to Europe via the Second Backbone Corridor – high voltage transmission lines that are also to be constructed with European support.

Putting these puzzle pieces together, one gets a very worrying picture for Ukraine and for the European Union.

Read more on both projects on our website:

The ‘Second Backbone Corridor’
Nuclear power plant safety upgrades

This text was updated on April 20 to:
– change the name of the environmental assessment that the EBRD agreed to accept from ‘Environmental Assessment’ to ‘Ecological Assessment’.

– correct the information on the stress tests in Ukraine which had already taken place at time of writing, but their final results have not yet been published.

Polish energy companies’ black propaganda threatens EU climate ambitions again

(This post is an article from the upcoming Issue 51 of our quarterly newsletter Bankwatch Mail.)

It was of course the EU’s largest new member state that in June last year vetoed the raising of the EU’s emissions reduction target from 20 to 30 percent. Similar tactics, fear Polish climate campaigners, are to be expected this year, perhaps as soon as tomorrow’s Environment Council Meeting.

In Poland itself, such is the strength of the Polish energy lobby that propaganda about the potential threat to the country posed by the EU climate and energy package permeates public debate and the national media.

The most recent example of these lobby efforts came in February with the publication of a report from the Polish Chamber of Commerce (Krajowa Izba Gospodarcza), together with the biggest Polish energy companies Tauron Polska Energia S.A. and PGE (Polska Grupa Energetyczna) S.A., that claimed that the costs of implementing the EU climate and energy package would be four times higher than estimations made by the World Bank and the European Commission (pdf).

However, as pointed out by 22 environmental groups – including Bankwatch – in a press statement released in late February, the report authors have conveniently left out a few details, allowing them to arrive at their magic number.

Left out altogether of the calculations in the industry report are the externalities of industrial energy production, the costs of coal subsidies and imports of coal, that reach 15 million tonnes of CO2. Hence, the baseline scenario against which the costs of the EU package are compared is grossly underestimated.

The business as usual scenario presented in the report includes investments in new coal-fired and gas-fired power plants that amount to over EUR 14 billion, representing one tenth of all energy investments required to be made by Poland by 2030 if the country is to be in line with the 450 ppm scenario set out in an International Energy Agency study dedicated to Poland from March 2011.

Yet what the report fails to include in this scenario is the EUR 10-19 billion in external costs passed to society every year by the Polish energy sector. It also fails to take into account the negative consequences of Poland’s growing dependency on imported coal – in 2011 the country imported over EUR 1.5 billion worth of coal. Also not included in the report calculations are the subsidies paid by the Polish government to energy companies – these totalled in excess of EUR 650 million in 2010.

Were these costs to be included in the baseline scenario, it would be found that supporting Poland’s current fossil fuel based energy system costs the Polish government and society at least EUR 15-22 billion every year. These are the costs that the Polish energy companies who bankrolled last month’s report do not want to speak about.

In fact, the true costs of Poland’s dependence on coal run much deeper. The dominant position of coal companies in Polish society weakens public debate, ensures that information about alternatives to coal fails to reach the general public, and thus in fact prevents the country from developing a green economy with new jobs and opportunities. Furthermore, Poles are paying for this coal dependency with their lives: pollution coming from coal lowers the life expectancy of the average Polish citizen by at least eight months, according to estimates by the World Health Organisation for the year 2000.

Ultimately this dependency is affecting the lives of future generations, whose quality of life looks set to become much worse if Poland continues down this dirty route that the industry profiting from it is intent on keeping open for as long as possible.

The European Commission, an EBRD shareholder that should start acting like one

Here at Bankwatch we’ve long been concerned by the lack of clarity about whether the European Bank for Reconstruction and Development is a European bank or not. Given its name, you might be forgiven for thinking it’s obvious, and indeed the European Union and EU member states do own 60 percent of the bank’s shares. The bank also claims to promote European standards, for example in the field of environment, and the European Commission has a seat on the bank’s Board of Directors, which approves the EBRD’s loans and equity investments.

But a closer look at what is going on with the EBRD’s investments in the Ombla hydropower plant in Croatia and the Boskov Most plant in Macedonia reveals that the European Commission doesn’t seem to make full use of its shareholder role in the bank.

Both projects look set to destroy areas with high biodiversity value which are proposed for inclusion in the Natura 2000 network. In the case of Ombla, the underground hydropower plant threatens unique subterranean karst fauna, in Boskov Most, the plant threatens the endangered Balkan Lynx. This has at least partly resulted from seriously sub-standard environmental impact assessments, which Commission staff said they had raised concerns about.

Yet a recent official information request asking for the results of the consultation within the different Commission Directorates-General was answered by the statement that

“I would like to confirm that there is no formal or informal result of an interservice consultation of the European Commission for the Ombla hydropower plant project to be financed by the EBRD. As for documents laying out the views of different Commission Services about this project, please note that these are for internal use only and cannot be disclosed as this would undermine the Commission’s decision-making process.” [1]

If there is no outcome from the interservice consultation, on what does the EU’s Executive Director at the EBRD base his voting decisions?

The European Parliament raised similar concerns in October 2011 in a legislative resolution on the EBRD’s capital increase. The resolution requires the EU’s Governor at the bank to report annually on how the bank has contributed to EU objectives. (See also our blog post on the occasion.)

To help these first steps bear fruit, we’ve also written to Commissioner Potocnik today (pdf) to ask him to establish a more functional process for ensuring that EU votes at the EBRD achieve maximum benefit for EU policy and that the European Commission engages more actively in EBRD policy revisions to ensure that the bank really does promote EU environmental policy.

EU environmental policy is not perfect, but its strict application in the EBRD countries of operation would be a big improvement on the current situation.

Notes
1. We’ve also appealed to the EC Secretary General on the latter part of this statement, because at least the environmental component of this information should be available under the requirements of the Aarhus Convention. We have the right to know whether the EU backed these projects, and whether its Executive Director at the EBRD insisted on placing any conditions on the approval.

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