Blog entry

The EIB’s safeguard rules must match its global ambitions

The European Investment Bank, the largest international lender in the world, has big plans. On 1 January it opened a new development branch, and it increasingly dubs itself ‘the EU climate bank’.

Tomorrow, the bank’s board of directors, made up of European Commission and member state representatives, will decide on a new environmental and social policy which must live up to these new responsibilities. Yet the final draft falls well short of these ambitions.

Despite the EIB’s patchy human rights record, the draft policy still lacks a clear system to assess and tackle potential human rights violations. In Kenya, an EIB-financed road project connecting Mombasa and Mariakani triggered more than 500 complaints due to inadequate compensation, forced evictions and intimidation. A similar fate threatens Indigenous Peoples in Nepal and Georgia, who are set to lose their land to EIB-financed transmission and hydropower projects respectively.

The EIB needs to improve its due diligence for identifying human rights risks and applying preventive mechanisms. It invests in sensitive locations, in large and risky projects and its clients do not always have distinguished human rights records. The right procedures must be in place to make sure that EU money doesn’t end up funding harm to people. Where the Bank identifies a high risk of rights violations, the EIB must require human rights impact assessments to identify, prevent and mitigate human rights impacts. This is not an extravagant request, taking into account the upcoming mandatory EU corporate due diligence legislation.

The draft policy also allows a third of the EIB’s lending to continue evading environmental and social standards and public scrutiny. In 2020, a third of the EIB’s investments – worth EUR 22.6 billion – took place through financial intermediaries. Yet due to the secrecy of commercial banks, the public has little idea of what happens to this money, whether it is effectively used and whether it causes environmental and social damage. It effectively disappears into a black hole.

But we do have some clues. The EIB has provided at least 27 intermediated loans for harmful small hydropower plants in southeast Europe since 2010, though we still don’t know the names of all the projects. Just last week, an appeal was submitted to the EIB’s complaint mechanism on two hydropower plants, which have damaged over 10 km of Serbia’s Crni Rzav river in a supposedly protected area. Similar damage has been inflicted by EIB-financed hydropower projects in Croatia, Montenegro and North Macedonia.

Apparently acknowledging the issues, the EIB has introduced a long-awaited new standard specifically for intermediaries. But it merely perpetuates the bank’s hands-off approach to such investments.

In theory, the rules require intermediated investments to comply with the EIB’s social and environmental standards. But in reality, the Bank refuses to commit to assessing and monitoring even high-risk projects, leaving project promoters and intermediaries to police themselves.

Neither can the public assist in bringing potential issues to the attention of the EIB, because no information is published about the final beneficiaries of intermediated lending.

At the COP26 conference in Glasgow, the EIB was one of the multilateral lenders which signed the MDB Joint Nature Statement, pledging to step up action to prevent biodiversity destruction and invest in restoration of nature. But maintaining a hands-off approach to one third of its portfolio is not the way to achieve this.

The draft policy is stronger on biodiversity protection in direct investments, but it still fails to keep vulnerable ecosystems completely off-limits for harmful investments. And it omits to stipulate appropriate assessments of project impacts on protected and internationally recognised areas beyond the EU and enlargement countries. Without such assessments, it is unclear how the Standard’s eligibility criteria can be properly applied, and the door remains open for projects that do not meet the EIB’s standards, such as Ukraine’s Tashlyk hydropower plant, currently under consideration by the bank.

If the EIB is to uphold its commitment to support the sustainable development of the countries where it operates, particularly outside of the EU, major improvements in the policy are needed.

It is up to the Directors to insist on improvements. As decision-makers in an institution which aims to be a sustainability leader and a central player in the EU development finance landscape, the Directors have a strong responsibility to act. The credibility of the EIB – and ultimately the EU – is at stake.

New complaint on hidden EIB hydropower financing in Serbia shows need for tighter standards

In March 2021, Bankwatch wrote to the EIB showing that two hydropower plants financed by the Bank via intermediary banks have damaged Serbia’s Crni Rzav river. Ten months and several reminders later, the EIB still hasn’t even admitted responsibility for financing the plants, let alone taken corrective action.

Together with the Ecological Association Rzav from Serbia, we’ve therefore submitted a complaint to the EIB’s Complaint Mechanism, both on the EIB’s failure to respond and on the environmental damage caused by the plants.

The Beli Kamen plant (1.68 MW) started operating in 2016 and the Komalj plant (0.6 MW) in late 2018. The investor is Zlatiborske Elektrane Ltd, which also has plans to build a third plant, Peta, just below Komalj. Both existing plants were financed by the EIB via loans for SMEs and priority projects channelled through Banca Intesa Beograd and Crédit Agricole Srbija. Bankwatch discovered this by chance in Serbia’s pledge registry, so concerns could not be raised before the construction.

The plants are in the Zlatibor candidate Emerald site, first proposed in 2006, and in Zlatibor Nature Park, established in 2017. Yet no environmental assessment was done before they were built.

Damage to the Crni Rzav

Research by WWF Adria carried out in 2020 shows that 9.2 kilometres of river between the intakes and Komalj powerhouse are affected, as well as additional damage downstream from Komalj. A study on macroinvertebrates showed that below the two hydropower plants, the river status was generally poor, while the river stretch not impacted by hydropower had a generally good status. Stone crayfish (Austropotamobius torrentium) was found in 2018, but not in 2020.

A study on fish also showed impacts that will also have serious consequences on species that prey on them and are protected in the Emerald site – otter (Lutra lutra), black stork (Ciconia nigra) and kingfisher (Alcedo atthis).

How did this happen?

According to the EIB’s rules, when it finances projects through intermediaries, it may get involved in doing environmental and social checks on projects but does not commit to. It is not clear whether the EIB did any assessment of the Crni Rzav plants or not.

And since it doesn’t publish any information about sub-projects financed via intermediaries, there is no chance for the public to come forward and raise concerns either.

It is therefore left to intermediaries like Banca Intesa Beograd and Crédit Agricole Srbija to do environmental assessments, despite the low likelihood that they have expertise in EU law or the EIB’s environmental and social standards. But why would intermediaries bother themselves with such details anyway? The likelihood of anyone finding out their role in the project was low, as was the likelihood of the Serbian authorities properly enforcing the law. And the guaranteed profits – thanks to the feed-in tariff system – were high.

First steps towards tackling the problem

Recognising the issues with its hydropower financing in the Balkans and elsewhere, in 2019 the EIB published its hydropower guidelines, which introduce some helpful new clauses, such as requiring intermediaries to provide more detailed information to the EIB on planned hydropower investments, to enable the EIB to decide whether to get involved in environmental and social assessment of the projects or not. It also states that intermediaries have to disclose a list of hydropower projects they are financing on their website and promptly address any queries from local communities or civil society organisations.

This is all good, but given the document’s ‘guidelines’ status, it is unclear whether it is enforced in reality and embodied in binding EIB contracts with intermediaries.

New policy set to take a step backwards?

Next week the EIB’s Directors will decide on the Bank’s new environmental and social policy, which includes a long-awaited standard for financial intermediaries. But the final draft is a damp squib.

It once again fails to require the public disclosure of at least high-risk intermediated projects, denying the public the right to know how public money is being used and to raise any concerns with the EIB.

And the EIB once again fails to commit to being involved in environmental and social checks even on high-risk intermediated projects. The same goes for monitoring. The intermediaries and project promoters get to continue policing themselves.

The EIB board of directors must take action

Next week, as the EIB’s board of directors decides on the draft policy, it must demand more. In 2020, a third of the Bank’s investments – worth EUR 22.6 billion – took place through financial intermediaries. Failure to reign in such a high proportion of the Bank’s lending is a huge risk for the EIB’s and ultimately the EU’s reputation.

No-one is expecting the EIB to get involved in due diligence for every single tiny loan carried out via intermediaries. But it must take responsibility at least for those which require an environmental impact assessment under EU law, as well as those which require screening to see whether they need a full environmental assessment. A list of such projects is already defined in Annexes I and II of the EU directive on Environmental Impact Assessment. Such projects must also be publicly disclosed before they are signed.

Other international financial institutions such as the EBRD, IFC and Green Climate Fund have taken steps to improve standards in this field, leaving the EIB lagging far behind. An analysis we produced last September showing the EIB’s inadequacies regarding intermediaries remains equally valid today, as the second draft of the policy has brought little change.

In other fields, mainly climate action, the EIB has shown it can be a leader. Gaps remain, but the EIB was a real pioneer among financial institutions by virtually excluding fossil fuel financing in 2019. It must do the same on financial intermediaries if it is to retain any credibility as it expands its ambitions to become a development bank.

This publication was produced in collaboration with EuroNatur and RiverWatch in the frame of the Save the Blue Heart of Europe campaign, with financial support from MAVA Foundation.

This publication was updated following a reply by the EIB to Bankwatch on 14 March 2022.

In Bulgaria, a cautionary tale for the energy transition as country abandons coal to gas switch

The Maritsa East 2 TPP is the largest coal– fired electric power plant in Bulgaria and all of southeast Europe, operating with an installed capacity of 1630 MW as one of three coal– fired thermal power plants in the Maritsa Basin of Stara Zagora.

Maritsa East 2 is the only one of these plants that is fully state owned, managed and operated by Bulgarian Energy Holding EAD (Български енергиен холдинг).

The region is noted for both its domestic production of coal and being the primary supplier of electricity for Bulgaria, producing approximately 30 percent of the country’s electricity.

Bulgaria is heavily reliant on the coal industry to generate electricity which, considering the determination of the European Union to reach net zero, means the government needs to act now and put Bulgaria on the path towards a green future.

The government however, under the leadership of previous prime minister Boyko Borisov, refused to adopt any sort of logical and ambitious plans to meet the problem of climate change and Bulgaria’s own responsibility to reach net zero.

In fact, it wasn’t even until October 2021 that the government, the second of two caretaker governments following two elections that failed to form a working parliament, committed to a date that it would totally phase out coal.

The government’s gas ‘solution’

With the need to phase out coal and the pressure on for the government to create ambitious plans to reach net zero, Bulgaria’s caretaker government was desperate to take action . It settled on the conversion of the Maritsa East 2 power plant to a gas– fired power plant of at least one gigawatt capacity, with the aim of replacing the capacity of the existing coal plant.

In order to complete the conversion, the government would not only construct a new power plant due to the requirements of new turbines but also entirely new infrastructure consisting of a 125-kilometre gas pipeline to enable supplies to the plant.

The total cost of the new plant was initially priced at BGN 1.66 billion (EUR 846 million \). The government intended to fund this by drawing BGN 498.7 million (EUR 254.9 million) from the EU Recovery and Resilience Facility and the same amount from the Modernisation Fund. The remaining cost was to be covered from private funding sources, though these sources were never published.

In order to fund the supporting infrastructure for the plant, the government said that it would grant a subsidy of BGN 362.7 million (EUR 185.4 million) to Bulgartransgaz, the national system operator for Bulgaria’s gas transmission network and a subsidiary company of Bulgarian Energy Holdings. The government also intended to draw the majority of this funding from the Recovery and Resilience Facility and requested an investment of BGN 333 million (EUR 170.2 million) from the Facility.

Overall, the government’s ‘solution’ would have ultimately cost the country over 1 billion euros. This represented just over 6.4 per cent of the planned total expenditure for the whole Bulgarian Recovery and Resilience Plan, locking the country into a fossil gas reliance for decades and stranding a significant amount of funding in just two investments out of a total of 59 and additional 46 reforms.

This would have forced further reliance on externally-supplied gas, at least half of which would be sourced from Russia through the Greece-Bulgaria Gas Interconnector. The gas plant would also perpetuate Bulgaria’s emissions through methane leakages, which is a far more potent greenhouse gas than carbon dioxide, and carbon dioxide emissions that are released when fossil gas is burned.

Furthermore, plant construction is generally an extended undertaking. Projects can take at least one to six years for completion, with some considerable delays to be expected. When taken into account with the usual longevity of operation of gas power plants, that would mean that this plant would operate past the 2050 net zero deadline of the European Union.

There is no future security in gas reliance. It is not fit for a net– zero future, which decision–makers already recognise, and has no place as a transitional fuel either, which decision–makers need to realise. This means that any carbon intensive generational capacity replaced with gas will eventually have to be replaced with actual net zero solutions.

The gas crunch

The risks and vulnerabilities of gas were further exposed as Europe entered into a critical gas crisis in October 2021 that saw the wholesale price of gas skyrocket. Europe frantically tried to source new gas providers, as Russia refused to increase supplies to alleviate this squeeze. The Russian government refused to increase its exports to Europe unless the Nord Stream 2 pipeline was given total approval – exposing the risk of manipulation as a result of dependence on external suppliers.

Due to a lack of domestic production of fossil gas and low-cost renewable based infrastructure and storage, the Bulgarian government was forced to restore its coal generation capacity. This was not an appropriate solution as people were still paying hugely increased energy prices – resulting from the demand/supply issue as well as factors like the increased price of gas.

Following the third parliamentary election on 14 November 2021, a coalition government was able to successfully form after a series of negotiations. Following the resumption of parliament in the new year, the deputy prime minister, Assen Vassilev, announced that the government was abandoning the plan to convert Maritsa East 2 from coal to gas.

The minister cited the gas crunch, issues in sourcing investments and the risk of stranding crucial financial assets in a project incompatible with long term net– zero targets.

The caretaker government initially presented this false solution to the public as a wonderful opportunity for the country. It said that gas was cheap, green and the easiest fuel for its transition. This was simply not the case, as the current government realised.

A cautionary tale

Abandoning a gas project that was previously regarded as the future of Bulgaria’s green energy policy should serve as a warning to other countries in central and eastern Europe that are looking towards gas as either a long-term solution or a transitional fuel.

A huge number of gas projects expect to draw funding from the EU across a wide number of funds. The Just Transition Fund, the Recovery and Resilience Facility, the Modernisation Fund and the Projects of Common Interest amounts to billions of euros of public funds. Every country in the region has in place multiple projects to create huge gas infrastructure which, as Bulgaria has already discovered, will spell a dark future for the future of green energy.

Modernisation Fund to boost fossil fuels in Poland

The Modernisation Fund is financed from EU Emissions Trading System (ETS) revenues and its goal is to support a green transformation in the ten poorest EU Member States, mostly in central and eastern Europe. It should finance investments in renewables, energy efficiency, energy storage, energy networks and just transition.

For the years 2021-2030, its budget is estimated at some EUR 14 billion but is likely to be considerably higher given rising ETS prices and the ETS reform announced in Fit for 55 legislative package. More than 43 per cent of the funds (roughly EUR 6 billion) is earmarked for Poland, more than the EUR 4.4 billion in the Just Transition Fund.

Far from modernisation

In its first year of operation, the Modernisation Fund invested in nine programmes totalling EUR 2.27 billion that Poland proposed to the European Investment Bank (EIB), the Fund’s operator. Nearly EUR 350 million or 15 per cent of this sum was approved for disbursement in 2021 and can be already spent. While some programmes should be applauded, like support for heat pump installation or building renovation, a disproportionally large sum went to mostly state-owned energy companies instead of municipalities, SMEs or individuals.

But the most worrisome are investments schemes earmarking millions of euro for highly efficient co-generation (CHP) with the possible use of fossil gas (two programmes to be worth EUR 667 million and EUR 444 million in total, of which EUR 44 million and EUR 66 million respectively has been disbursed) and for waste incineration (EUR 222 million, with EUR 44 million disbursed).

Poland plans to launch two programmes for CHP within the Modernisation Fund, one for district heating and one for energy and industry. The first allows for so-called low-emission gases, a mixtures of gases, synthetic gas and hydrogen, which can include fossil gas and hydrogen made using gas. The second is open to any “gas fuel” (along with renewable energy sources and waste heat) in newly built or renovated CHP installations larger than 10 megawatts.

This will most probably result in fossil gas projects, benefiting enterprises in the energy sector (of no less than 50 MW installed power). Energy storage projects connected to these CHP units are also eligible for funding.

Another programme, “The use of alternative fuels for energy purposes” is again targeted at enterprises and supports the construction, expansion or modernisation of incinerators using CHP technology and waste or other alternative fuels produced from residual waste. Waste incineration is not eligible for EU funding under the cohesion or recovery funds and such investments were removed from the Polish National Recovery and Resilience Plan during public consultation.

Civil society had no chance to comment or oppose those harmful programmes before they were sent for assessment to the EIB. The lack of transparency at the Modernisation Fund, both on the national level and at the EIB, is problematic. In Poland, the National Fund for Environmental Protection and Water Management (NFOŚ) is responsible for the fund. By law, NFOŚ is responsible for ensuring transparency, yet no monitoring committee of any kind was created in Poland (like the stakeholders’ platform functioning in Czechia.) Public consultations were held weeks after the EIB approved the programmes, with no chance of significant change to the investment schemes. The EIB’s Investment Committee also published documents with a delay and incomplete.

Wasted chance

At least EUR 1.3 billion, or nearly 60 per cent of all funds in currently approved programmes under the Modernisation fund can now be spent on investments not in line with the European Green Deal (do no significant harm principle, circular economy and waste management objectives) and that will push Poland towards fossil gas lock-in.

The lack of transparency, together with the tendency for investments to be reallocated from recovery and cohesion funds to the Modernisation Fund, risks the green transformation in Poland and the region.

The upcoming revision of the ETS Directive is an opportunity to eliminate shortcomings of the Modernisation Fund by banning fossil fuels from the fund (although the Commission proposes currently to do this partially).

Changes are needed both to legislation and implementation. The Commission must demand increased transparency from the Modernisation Fund’s management at both the EIB and Member States. The partnership principle must be extended to the Modernisation Fund, and standards for public consultation laid down in the European Code of Conduct on Partnership must apply.

The Modernisation Fund is an important tool to implement the European Green Deal and support the shift from coal to renewables, compliance with the decarbonisation and climate objectives, and at the very least the ‘do no significant harm’ principle should be applied to all investments supported by this instrument.

War returnees won discrimination case over re-routing of the EBRD and EIB financed motorway

On December 28, 2021, the Municipal Court in Mostar ruled that the Federation of Bosnia and Herzegovina’s decision to build the Corridor Vc motorway through Kosor, Malo Polje, Blagaj, Ortiješ, and Lakševine constituted covert discrimination against affected people by failing to conduct public consultations and justifying the changes to the Spatial Plan in 2017.

The court concluded that the seemingly neutral practice of changing the motorway route indirectly discriminated against the plaintiffs, because of the inadequate justification and lack of public consultations for the changes to the Spatial Plan. The court also acknowledged that the war returnees have a disadvantaged position in realizing their social and economic rights in FBiH. The European Corridor Vc, which runs for 330 kilometres across Bosnia and Hercegovina, is a part of a bigger infrastructure project that connects the Croatian coastal town Ploče with Budapest, Hungary’s capital city.

On 25 December 2017, the FBiH Official Gazette announced that the FBiH parliament approved amendments to the Spatial Plan that shifted the subsection between Mostar and Počitelj from the Podveležje ridge to fertile terrain in the Neretva River valley.

The court verdict is significant because it is the first to legally confirm residents’ and Bankwatch’s contention that the present routing of this section of the motorway was implemented without any public discussions.

Echoing local resident’s allegations, Bankwatch argued in 2020 that the decision to relocate the route was non-transparent and was based on a multicriteria analysis that was not publicly available at the time. It lacked proper environmental and social impact assessments and cost benefit analysis, which are required by the international financier, the European Bank of Development and Reconstruction.

Local residents have repeatedly opposed the new route of the Mostar-Pocitelj section. Besides destroying fertile land of the Neretva valley, residents claimed that the re-routing of the motorway has disproportionately negative impacts on the lives of war returnees whose livelihoods largely depend on agriculture.

According to Milenko Krcum, the legal representative of the plaintiffs, the court’s ruling supports local residents’ allegations of undue political interference on the decision over the Spatial Plan. To him, “the Federation of BiH did not prove that the change in the highway route was justified and necessary, and therefore points to the possibility that the new highway route was motivated by covert political motives.”

By extension, the verdict also raises questions about the financing of Corridor Vc South Mostar section by the EBRD. The Independent Project Accountability Mechanism of the bank is currently reviewing the project’s compliance with the Bank’s policy requirements. According to the EBRD’s safeguards policy, ethnic minorities should be identified as vulnerable populations in need of greater protections and dialogue.

According to Bankwatch’s review of the subsection’s 2020 environmental and social impact assessment, no special attention was given to the impacts on the livelihoods of war returnees and suitable mitigating measures to protect their rights were missing.

Can litigation succeed where politics has failed so far? Affected local people are determined to defend their rights through all legal avenues. And meanwhile the financing of Corridor Vc needs to be brought into compliance with European standards. The review by the bank’s complaints mechanism is expected to result in important recommendations for new assessments and consultations before the final route of the South Mostar section is chosen.

How ADB’s pandemic aid to Uzbekistan was misused, whistleblower silenced

The article was originally published in Eurasianet.

Ever since international financial institutions contributed to Uzbekistan’s Anti-Crisis Fund early in the pandemic, bloggers and activists in the country have warned that the Fund’s management lacks transparency and that more oversight is needed to prevent misuse and embezzlement.

Miraziz Bazarov was one of the first to sound the alarm. In July 2020, he wrote a public letter to the Asian Development Bank (ADB) – the biggest contributor, which loaned $600-million to the Fund – and the World Bank, urging them to stop providing aid until Tashkent establishes clear anti-corruption mechanisms and publishes a full accounting of how it is spending the money.

Bazarov was later publicly smeared and savagely beaten. He also faces criminal charges, apparently in retaliation for his activism.

Now we at Bankwatch can affirm Bazarov’s concerns about likely fraud.

Opaque spending

Bankwatch analyzed the limited data published by the Anti-Crisis Fund in August 2020. Though the lack of transparency makes it almost impossible to verify how Uzbekistan is spending the money meant to battle the coronavirus outbreak, our new report highlights several troubling trends that must be investigated.

For example, three companies allegedly affiliated with people close to Uzbekistan’s president and the mayor of Tashkent received the largest contracts for the construction of medical facilities.

Because there were no tenders held for these projects – and because there are almost no effective mechanisms of public control over the authorities in Uzbekistan, such as independent media – such patterns call into question the objectivity and independence of the Fund’s decisions in favor of these companies.

Procurement by healthcare institutions in particular regions, including the city of Tashkent, significantly exceeded the potential demand based on population size. The total cost of personal protective equipment purchased in Fergana region was almost three times the national average. The authorities in regions with extremely poor healthcare systems asked for the most non-medical goods and services: In Kashkadarya, Namangan and Samarkand, the authorities used funds for non-medical purposes, constructing municipal infrastructure, for example.

Retaliation for speaking up

In July 2020, Bankwatch and Bazarov sent a letter to the ADB’s management, including its office in Tashkent and Board of Directors, and filed a complaint with the ADB Office of Anticorruption and Integrity outlining the cases of confirmed or potential embezzlement.

Within a couple of days, Bazarov was contacted by a person from the national security service, his phone was apparently hacked, and his photo was published on a sex-service portal labelling him as gay (which is criminalized in Uzbekistan). A smear campaign against Bazarov continued for almost a year and, in March, he was severely beaten, then placed under house arrest and charged with slander and hooliganism.

Bazarov expects his trial to begin imminently.

There is a clear link between Bazarov’s critique of the government and his current legal troubles. Eight international human rights organizations, including Freedom House, have called on Uzbek authorities to “stop any attempts to prosecute him for exercising his rights” to freedom of expression. Representatives of the EU delegation in Uzbekistan have also confirmed the link.

Yet the ADB office in Tashkent has refused to see the connection. In September 2021, the ADB decided not to investigate the initial complaint of corruption, and on November 18, it closed its inquiry into allegations of retaliation by the Uzbek government against the blogger.

The ADB has also declined to comment on our findings, though earlier it told us it was following its own “clear process for monitoring the use of these resources.”

As an institution, the ADB is currently seeking public input for an internal safeguard policies review. This is an important opportunity. Before investing in an authoritarian country like Uzbekistan, the Bank must address the lack of transparency, freedom of speech and assembly, retaliation against human rights activists, and limitations on NGO registration there. Otherwise, the spending risks undermining the Bank’s stated goals to support development.

Development banks must hold their clients accountable. As Bazarov’s case confirms, the ADB has no effective mechanisms to prevent retaliation and ensure protection for the civil society actors that are critical to its mission.

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