Bankwatch

Home > Archives for Blog entry

Blog entry

In times of crisis – Poland’s take on the Emperor’s New Clothes


Europolitics yesterday reported that the Polish government is pushing for European legislation on public private partnerships (PPPs) [1] that would allegedly make this mode of financing an solution for public investments in the face of budget deficits and debt.

The solution, according to Poland lies in not including the (inevitable) public costs of a project in the public finance books when a contract with a private partner is being signed. Eurostat – the EU’s statistical office – already allows many PPP investments to be left out of public accounts, provided that certain kinds of risks are transferred to the private sector, but classifies public costs as deficit and debt. This, so the Polish believe, leads to “the principle of PPP [losing] its appeal”.

To be more clear, what Poland proposes is basically to completely ignore the future costs of a public investment, although these are already agreed, signed and sealed in the PPP contract. Unfortunately that is no solution at all – except in the dreams of public administrations. (Building public infrastructure and hiding the debts it runs up? Fantastic!)

PPP is already now a way to keep most of the debt off the public balance books. If Eurostat followed Poland’s suggestion, this would become an even more encompassing habit with profound effects. Public expenditure and public debt would be much less foreseeable. The impact of the postponed debt is then felt later by administrations and consequently by tax payers. That this is no theoretical threat is proven by the serious repercussions of invisible debts run up through PPP projects in European economies like Hungary and Portugal, which are both reviewing whether they should use PPPs at all any more.

After two decades of PPP bingeing in the UK (one of the “PPP pioneers”) recent studies evaluating the British public private partnerships have led to a number of very sobering conclusions.

I will only include a few quotes here that point out the enormous risk that PPPs (and the British variant, the Private Finance Initiative, PFI) pose to public finances. As you can see, these conclusions all go in the opposite direction of Poland’s proposal.

    • PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that.
    • We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab.
    • PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits.

    Andrew Tyrie, Chairman of the Treasury Select Committee in the UK parliament presenting a new report assessing PFIs in Britain, August 19, 2011.

    Source: www.parliament.uk

    • it is far from clear that it has provided value for money. At present, PFI looks like a better deal for the private sector than for the taxpayer.
    • the use of this form of financing has been based on inadequate comparisons with conventional procurement
    • We have seen information which strongly suggests that investors are making excessive profits from selling on shares in PFI projects. However, the Government currently lacks sufficient information on the returns made by investors, who have been able to hide behind commercial confidentiality.

    Rt Hon Margaret Hodge, Chair of the Committee of Public Accounts, speaking on the publication of the report Lessons from PFI and other projects on September 1, 2011.

    Source: www.parliament.uk

To read more on experiences from central and eastern Europe, read our 2008 study Nevermind the balance sheet – the dangers posed by public-private partnerships in central and eastern Europe

 

1. An arrangement whereby a public project or service is partially financed or run by a private company – http://oxforddictionaries.com/definition/PPP

PPPs have especially in the UK, but increasingly also elsewhere, become a popular way to partly avoid the financial burden for example of public infrastructure investments on administrative budgets. The financial burden certainly isn’t being avoided at all, but merely postponed to the future by allowing the private partner to charge either the users or the state (or often both) for the public service the PPP project provides.

Contemplating secure and insecure energy supply


The EU approach has been and continues to be (as this communication and its enthusiastic endorsement by the Polish Presidency shows) focused on supporting energy infrastructure mega-projects that cost billions of euros but are often not feasible from both economic and environmental perspectives.

The Nabucco gas pipeline project is an obvious example, but we can also look at completed projects to note the same pattern. The Medgaz pipeline, which has experienced serious cost overruns, is also facing operational challenges: Neither does Spain need the amount of gas this pipeline can supply, nor can Algeria surely supply the amount of gas this infrastructure can take.

Many of the mega-projects prioritised by the Commission in this communication actually increase the energy insecurity of the EU: they make the block dependent on authoritarian regimes that run countries at their own whim. What kind of “security of supply” can such governments offer?

Even more, reliance on such business partners as the leaderships of Turkmenistan and Azerbaijan makes a mockery of the EU’s human rights commitments. The EU argues that energy cooperation with these countries can be beneficial even from a human rights perspective: non-engagement or even sanctions in the case of these countries would be counterproductive, goes the EU argument, but broadening energy ties would ensure the intensification of the human rights dialogue. Yet, what we have seen in the past is that energy cooperation has not been able to bring about democratisation, neither in Central Asian countries nor in the North African economic partners of the EU.

Rather than pursue the approach proposed by the Commission, the EU would be better advised to both explore more thoroughly sustainable energy scenarios inside the Union and to encourage them in partner countries.

Image: EC president Barroso with Turkmenistan’s president Gurbanguly Berdymukhamedov

New EIB report on SMEs: another rabbit in the hat from our favorite bank


with Anna Roggenbuck

The European Investment Bank boasts on its website „During the financial crisis, the EIB Group made an exceptional effort to help small and medium-sized enterprises.” The EIB also claims in a study published mid-July „Some 105 000 SMEs received EIB Group support in 2009 and another 115 000 in 2010.” We beg to differ.

In 2008, the EIB initiated a stimulus package which included the immediate deployment of an additional EUR 15 billion to its ‘global loan’ lending in order to help support the small- and medium-sized enterprise (SME) sector across the EU. Global loans are a form of funding which, unlike the EIBs standard project financing, is provided to third party intermediaries (predominantly commercial banks), who then lend out the funds along with their own contribution to borrowers.

At the end of 2010, Bankwatch published its own assessment of the EIB crisis support for SMEs in Central and Eastern Europe, a much less optimistic evaluation of the Bank’s financing for small and medium enterprises than the self-assessment published by the EIB in mid-July.

The Bankwatch analysis of how this money was used in CEE concluded that, in essence, a package that was designed to stimulate the SME sector during the global financial crisis appears to have provided greater stimulation to the intermediary banks who were the initial recipients of the funding. Intermediary banks were not really rushing to pass on the money to enterprises. Until November 2010, according to the most optimistic evaluations, only 69% of the amount signed out by the EIB had been allocated to SMEs by intermediaries; for each intermediary that allocated the full amount provided by the EIB to SMEs, there was one intermediary which had not allocated even one cent. Additionally, SMEs in the region have themselves reported difficulty accessing the EIBs additional funding, largely due to the tightened lending conditions and restrictions imposed by local banks.

The Bankwatch report caused some furor among the EIB staff, which struggled earlier this year to contradict our findings and defend its investments. The overall feeling was that our report dealt a heavy blow to the credibility of EIB global loans. We held a hope that our analysis would force the EIB into some introspection and that the bank would consider reforming its lending system to remedy some of the deficiencies we had pointed to. Unfortunately, the July EIB report on SMEs lending proves that the bank prefers to create documents that help it hail its own achievements rather than honestly attempt to reform its practices in a way that can really help the SMEs.

Here are some aspects of the EIB report we find troubling:

  • The EIB’s definition of SMEs – as enterprises with up to 3,000 employees – differs significantly from the criteria used by the EU (even though the EIB calls itself the ‘EU bank’). The EIB’s medium enterprise is over ten times bigger than what the EC official recommendation proposes. Certainly, this faulty categorization has a serious overestimating impact on the EIB claims about the numbers of enterprises they were able to assist.
  • The EIB claims that it specifically responded to difficulties faced by Central and Eastern European SMEs in accessing funding. However, there were CEE countries in which the EIB’s support for SMEs decreased compared to previous years. It is therefore not surprising that the EIB intervention has not even been noticed by some countries’ central banks (e.g., in Poland) monitoring the financial markets.
  • Additionally in CEE, EIB loans were directed more often to larger SMEs: while, using EIB numbers, in the EU 27 the average size of an allocation to SMEs was equal to 157,000 Euros, in our region the average allocation was more than twice as large.
  • EIB boasts in its report about how fast the SMEs were able to receive the support from the bank, on favorable and easy conditions; but, in reality, the bank only launched the scheme after a call from its shareholders who were concerned that commercial banks had stopped financing SMEs for a couple of months already. For example in Poland the first anti-crisis loan for Fortis Bank was signed in November 2009, well after financing for SMEs had dried up after the onset of the crisis end of 2008.
  • The EIB claims that, with this scheme, it has introduced a “revolutionary change” in the sense that loans were supposed to be more transparent and accessible via simplified procedures. Unfortunately, our research showed that, at most, this was a revolutionary change to the benefit of the intermediaries, but not of the SMEs: available pricing advantages for SMEs are well-kept secrets of the EIB and intermediaries; in our attempts to get information about how the EIB funds were disbursed, even well-reputed Western banks refused to give us the information requested – what kind of improved transparency is that?
  • Finally, the EIB report underlines the necessity of continuing the global loans scheme for SMEs after the crisis has faded out, as these enterprises are so important to our economies. In this case, a proper assessment of the consequences and impacts of the crisis package would be really necessary if the EIB’s global loans to SMEs are to genuinely bring about positive effects. Until now, we do not see any proper assessment of this kind. We see only window-dressing such as this July report, more self-promotion than honest self-reflection. We believe the EIB can and should do more!

Original image CC 2.0 courtesy of Wisconsin Historical Images

No more (EU) sweeping under the rug!


Have you heard about the Great Smog of 1952? It was a severe air pollution event that affected London more than half a century ago. Cold weather and no wind meant that airborne pollutants – produced primarily by coal plants – formed a thick layer of smog over the city. It is estimated that 4,000 people died prematurely and 100,000 others were made ill because of the smog’s effects on the human respiratory tract. This tragic event led to important legislative changes, including the Clean Air Act of 1956.

Today, the air in London and other Western cities may seem cleaner. But the truth is that the “smog” has been sent to poor countries: polluting factories have been relocated to developing countries with laxer environmental regulations; lower labour remuneration and ignoring pollution in calculating production costs means that Western consumers can continue to buy cheap while people in developing countries are chocking and falling sick in their place. The European Union today – with its open economy – relies heavily on imported raw materials and energy.

But we cannot continue to play the game of hiding the “smog” out of sight. The planet is one, and no matter where we shift pollution costs, the pressure human society is placing on nature has become unbearable. The brunt is now borne by the world’s poorest, who are also consuming the least. This is a deeply unjust situation that needs severe remedy.

The era of plentiful and cheap resources is over. Minerals, metals and energy, as well as stocks of fish, timber, water, fertile soils, clean air, biomass, and biodiversity are all under pressure. Whilst demand for food, feed, fuel and fibre may increase by 70% by 2050, already today 60% of the world’s major ecosystems that help produce these resources have been degraded or are being used in an unsustainable manner.

The first inspiring thoughts about a Resource Efficient Europe came from Environment Commissioner Janez Potočnik who stated : “We are serious about making Europe a resource efficient economy as we set out to do in the Europe 2020 Strategy. This is not just about reducing negative environmental impacts and green house gas emissions, it will also create jobs; in the waste recycling sector alone half a million jobs could be created”. Only shortly after that confession, UN secretary general Ban Ki Moon said: “For most of the last century, economic growth was fueled by what seemed to be a certain truth: the abundance of natural resources. We mined our way to growth. We burned our way to prosperity. We believed in consumption without consequences. Those days are gone. In the twenty-first century, supplies are running short and the global thermostat is running high.” These acknowledgements from some of the world’s most important leaders now need to be followed up by deeds.

A small step in the right direction could be the EU Roadmap to a Resource Efficient Europe, a document currently under review and to be adopted in the fall. If prepared properly, this document could play a part in turning Europe into an economic system which allows us to create more with less – without such a shift, the road ahead is doomed.

According to a draft roadmap prepared by the European Commission’s environment department, the EU is intent on actually setting resource efficiency targets for the block by 2013. This is good news.

Nevertheless, our colleagues from Friends of the Earth argue that the roadmap does not seem to take into account the impact of EU’s material use outside of its borders through the supply chain: indicators based on domestic material use do not give a full picture of real consumption and waste. According to the European Environmental Agency (EEA) 2010 State of the environment report, “Despite significant efforts to reduce emissions, air pollution continues to cause damage to people’s health and the environment. Current concentrations of fine particles cause 500.000 premature deaths in the EU and immediate neighborhood.” These facts are surprisingly worrying, but what is even more worrying is the unknown number of premature deaths caused by pollution in developing countries where the factories, mines, fisheries, agricultural fields and forests producing the goods consumed in Europe at the moment are actually located.

Agreeing with the FoE remarks, what has CEE Bankwatch been doing to improve the quality of this document?

After our initial communication with European Commission President Juan Manuel Barosso from January 2011, in May this year, we warned that EU climate targets cannot be achieved in the absence of binding energy efficiency and sectoral resource efficiency targets, backed up by appropriate financial support.

Analyzing the evolution of EC documents on resource efficiency makes us think that, indeed, we have made an impact on the Commission’s thinking on the matter: some of our major concerns were seriously considered and taken into account. For example, some of the technological solutions previously prioritized at EU level were carbon capture and storage (CCS) and nuclear energy, which – after serious opposition from Bankwatch and other NGOs — are nowhere to be found in the new versions of the documents. This is quite a success and we do hope that these technologies will never find an open door to come into the strategy again.

On waste, we have been advocating for more than five years for fair funding opportunities for waste management projects. The new EC communication states, “Ensure that public funding and particularly EU funding supports the move up the waste hierarchy (e.g. support recycling plants rather than incinerators).” We are happy to see this in the document because implementing the waste hierarchy is indeed the right way to bring truly beneficial environmental effects. The second important target of our advocacy has been higher recycling targets (70%) for EU member states. In its draft roadmap, the EC has announced — even though in vague wording – that it would review existing prevention, re-use, recycling and landfill diversion targets in order to move towards an economy based on recycling, with residual waste close to zero.

Close to zero?

Right, this is more than we expected. But for now it is vague wording. From here, the long struggle begins to make sure that this intention is turned into a strong commitment, and that it is then implemented by the member states. Even more, we have to make sure that such an ambitious target is supported through proper and fair financing mechanisms, rather than through dubious instruments that have failed to provide results in the past such as public-private partnerships (PPPs) — for which the European Investment Bank is continuously lobbying to get included in the Resource Efficient Europe Strategy.

All in all, we are pleased with this first effort from the Commission. But between words and deeds there is a long distance and oftentimes the devil is in the details. We hope that the final Resource Efficiency Roadmap to be presented this fall indeed moves Europe in the direction of less consumption and waste.

Chercher la femme: gender equality sidelined in international finance


Five years ago, together with a few colleagues, I visited several Azeri and Georgian communities along the route of the Baku-Tbilisi-Ceyhan pipeline, an EBRD-sponsored project which, it was claimed, would contribute in significant ways to the development of localities along its route.

Previous experience had indicated that large extractive projects can potentially bring about a host of negative impacts on women and gender equality. Such effects are project-specific and can range from increased poverty and dependence on men to the proliferation of sexually transmitted diseases and sexual harassment and even to forced prostitution. At the same time, we had heard numerous statements from the (male) heads of international financial institutions (IFIs) such as the EBRD, who declared themselves committed to reduce or compensate negative effects on women’s lives – if not improving the women’s condition – through their projects. We were sceptical and decided to find our for ourselves: how does it work in practice?

Our field trip to Azerbaijan and Georgia proved to us that men in suits, sitting in offices in London or New York and approving financing for large extractive industries projects are wrong about the consequences of their decisions on women’s lives. We found that BTC has supported increased prostitution and trafficking along the route of the pipeline, has brought a number of health problems to some areas, and has worsened socio-economic conditions for some communities – making especially women’s lives more difficult.

The project promoters had promised employment opportunities: we found that job offers were fewer for women than for men and more often involved short-term, insecure contracts. They were in menial positions (cleaning, cooking) and they involved 12-15 hour work days. Given the scarcity of employment opportunities in the region, women reported that they simply put up with sexual harassment on the job, and in the rare cases when they did report, it was only after being fired. Moreover, the pipeline construction work and accumulation of male workers had increased rates of prostitution and trafficking and even of HIV and drug trade in some regions along the route.

Five years later, I have witnessed many more impacts on gender equality by individual investment projects. I have concluded that, even though the main international financial institutions are supposedly trying to mainstream gender issues in their policies, there is still too little systematic thinking about the real-life impacts of their projects.

Addressing gender inequality does not mean upholding women rights in theory. It means caring about the detailed and long-term consequences of the developments we choose to support. And large macroeconomic programs or infrastructure projects can have long-term negative impacts both on women and men, girls and boys, which in the end are problems of society as a whole.

Unfortunately, we cannot rely on bankers or politicians to address this. No matter what they declare. It is still the non-governmental organisations (NGOs), local groups, and women organisations, those closest to the impacts on the ground, who will lead this struggle. This is why, for them, together with a few colleagues, we have put together a gender toolkit (pdf) for monitoring projects sponsored by international financial institutions and for working to improve the gender practices of these organisations.

The toolkit (pdf) is based on experiences of different Bankwatch campaigners who have witnessed all kinds of problems caused by internationally sponsored projects. The toolkit is meant to support NGOs from the early steps of their engagement with IFI-sponsored projects. It gives hints about how to identify potential gender related problems and shows ways to prepare for the prevention or mitigation of such problems. It recognises the fact that different types of problems can be provoked by similar projects in diverse socio-cultural environments and takes it into consideration when proposing ways to really mainstream gender equality in our lives.

Bypassing responsibility

The Georgian Railway Company wants to construct a new railway section to avoid transporting hazardous freight through the middle of the city. These are worthwhile objectives, and so the European Bank for Reconstruction and Development (EBRD) approved a loan of EUR 100 million, or roughly one third of the costs, for the Tbilisi Railway Bypass Project.

What the EBRD didn’t take note of though was that implementation the project as planned by the Georgian Railway Company poses several threats to the well-being and safety of Tbilisi residents that could undermine the entire project before it gets started.

The planned railway will pass properties in the Avchala community as close as 30 to 150 metres away. Because of the hazardous freight and its smell, and the vibrations and noise associated with its transport, the living conditions in the area will deteriorate and will devalue the local properties, the price of which has already decreased more than three times since the announcement of the project.

To stop this from happening, Bankwatch member group in Georgia Green Alternative filed three complaints [1] to the EBRD arguing that the Social and Environmental Impact Assessment (ESIA) was incomplete and did not offer appropriate solutions for the community.

Last week the EBRD’s Project Complaints office agreed to investigate all the concerns raised by Green Alternative. While this first procedural hoop – the so-called eligibility assessment – is not intended to make any judgement about the complaint itself, we see this as an encouraging sign that the social and legal consequences of the project that we’ve documented will be rectified.

There are three main points in our complaint, all of which the EBRD’s complaint officer will further investigate:

    Unsatisfactory analysis of alternatives

    The project assessment proposed only formal alternatives that would never have been feasible. An alternative route that the Avchala community suggested was immediately dismissed without proper analysis.

    Meaningful, public participation lacking

    The affected locals were uninformed of the existing alternatives and had not been invited to all relevant meetings. They were given the absurd justification: “Since no decision on the final routing had been made at that stage, it was decided not to contact them and avoid disturbing them”. [2]

    Breach of national legislation

    By failing to submit progress reports on environmental issues to the Georgian authorities, the Georgian Railway Company not only broke the law but also effectively prohibited NGOs from monitoring the project and its social and environmental impacts.

In a letter to Bankwatch, the Project Complaints office committed to addressing not only the social issues we raised but also all environmental issues surrounding the project: the impacts on air quality, the Tbilisi water reservoir, protected areas, waste management and so on. According to the office, both procedures will be initiated in September this year.

The Avchala community and Green Alternative welcome the decision of the EBRD. Certainly, while it obviously would have been better to just properly asses the project in the first place, we’re hopeful that the EBRD, in this thirteenth hour, will try to remedy some of the serious deficiencies beleaguering this project.

 

Image CC 2.0 courtesy of Theen Moy

1. Green Alternative’s Complaint (pdf), a Collective Complaint of Avchala Population (pdf), Mr Asatiani’s Complaint

2. ESIA of the project: Chapter 4.1.2, p.65 “Scoping meeting”.

UPDATE 22 August 2011: This article was amended to clarify the position of the EBRD Project Complaint office with respect to Bankwatch’s complaint.