Blog entry

China must walk its EU standards talk

China has put multilateralism and openness front and center of the Sofia meeting this week, yet it is still not clear to the public of Europe which of the 16 CEE countries’ energy infrastructure projects are seeking Chinese financing at the event. A signing ceremony has been announced, but the list of projects on which financing agreements and memoranda will be signed is veiled in secrecy.

Compared to the China-led “16+1” meeting in Belgrade, Serbia, in 2014, when the EU was marginally invited as an observer to the meeting, efforts to improve inclusivity have been called for and acted upon, at least in the headlines. However, China’s striking of bilateral trade deals with the EU’s prospective Western Balkan members and investment-hungry Eastern members have continued to irk Brussels.

Mutual access to each other’s markets and the securing of public procurements remain top priorities in recent EU communications to Beijing. At the same time, Brussels has recently been seen to dial up a notch in voicing its concerns on the environmental and climate change impacts of China’s Belt and Road Initiative in its backyard and beyond.

The European Parliament in its May report on the state of EU-China relations has gone so far as to emphasize that, it “regrets the absence of professional sustainable impact assessments in various projects relating to Belt and Road and underlines the importance of investment quality,” and urges investments to respect ”environmentally sound production and mitigation of climate change,” in line with international standards.

At last year’s “16+1” meeting in Budapest, China granted a $732 million loan to Bosnia and Herzegovina through a loan agreement by China Eximbank for Tuzla coal-fired power station’s new 450 MW unit 7. The agreement was signed in spite of the ongoing environmental and energy permitting irregularities and court challenges surrounding the Tuzla 7 coal project, as well as bypassing federal parliamentary approval which is required by Bosnian law.

Addressing Europe’s rising concerns over “16+1 Cooperation” in a recent statement, China’s Foreign Minister claimed that the cooperation under the framework, and that “relevant laws and regulations of the EU 16+1 Cooperation,” have always been adhered to, while the outcome of all previous meetings made clear that future cooperation between China and the 16 Central and Eastern European countries “should be carried out in accordance with the EU law and regulations.’’

The reality is, despite its pledge to be the world leader in clean technologies exports, China continues to consider financing and/or supplying equipment to seven or so new coal-fired power units planned in southeast Europe. None of these is guaranteed to be in line with the EU’s current pollution control standards, the so-called Best Available Techniques Reference Document (BREF) for Large Combustion Plants. The environmental impact assessments are also of low quality, with all the ones done so far being challenged in court.

Ongoing Chinese financing in the Western Balkans’ energy sector is already enabling non-compliant coal projects like Serbia’s Kostolac B3 and Bosnia’s Tuzla 7 to move forward, thus putting European regulatory harmonization and decarbonization at risk. Other “at risk” planned coal-fired plants in the southeast European countries – Meliti II in Greece, Banovici, Kamengrad, Ugljevik III, Gacko in Bosnia and Herzegovina, and Rovinari in Romania – are also seeking Chinese financing. If realized at the upcoming Sofia meeting, this will turn China’s Belt and Road ‘Balkan Corridor’ into a coal corridor in Europe’s courtyard.

One thing is for sure. As China and its partners discuss potential projects for financing in Central and Eastern Europe at the summit this week, we shall see if China will honour its commitment to cooperate within the EU’s laws and regulations, or continue with its coal business as usual.

How the EBRD can seize the day in sustainable development

Guest post by Kindra Mohr, Policy Director for Accountability Counsel

Last month against the striking backdrop of the Dead Sea in Jordan, delegates and dignitaries, public and private sector representatives, and members of civil society gathered for the European Bank for Reconstruction and Development’s 27th Annual Meeting and Business Forum. In his town hall with civil society, EBRD President Sir Suma Chakrabarti explained that more feedback from the ground makes the Bank’s projects better and investments smarter. As I’ve seen in my own work on the impacts of EBRD investments on communities, rhetoric about more feedback leading to smarter lending requires a renewed commitment through both policy and practice. The EBRD’s current comprehensive policy review provides a timely chance to integrate this commitment into the EBRD’s architecture. Continued leadership and incentives from the top are needed to then see the policy through to practice and impact.

EBRD annual meeting in Jordan. Photo credit: Accountability Counsel

Born at a time of sweeping transitions in 1991 to transform Central and Eastern Europe, the EBRD is no stranger to challenging environments. But as the EBRD forges ahead in regions farther afield, including the Middle East and North Africa, and tentatively considers future markets in sub-Saharan Africa, it must take every opportunity to ensure that it is fully capable of delivering sustainable development in areas of the world that are starving for it.

The recently-launched review of EBRD environmental and social safeguards, public information, and independent accountability mechanism policies is known as a policy review trifecta in the development world. These policies together establish the core of a development finance institution’s approach to development, defining the extent to which it values the rights of the communities it impacts, operates transparently, and is grounded in accountability and access to redress when negative impacts occur. By closing current gaps and modernizing these policies so that they are strong enough to withstand shocks in the coming years, the Bank can set itself up to realize sustainable impact. Bank leadership – right now – needs to focus on shoring up the trifecta.

While strong policies themselves are not sufficient to deliver such impact, they anchor institutional governance, practice, and culture that will serve as the foundation for a community-centered, inclusive approach to development. Sustainability is predicated upon local buy-in and ownership, where communities are empowered to drive the development decisions that affect them. This cannot occur when rights are violated, investments are shrouded in opacity, and communities bear the burden of negative externalities without remediation. At Accountability Counsel, we have witnessed this in development projects across the globe, in geographies as diverse as Haiti, India, Liberia, and Mongolia.

Rigorous environmental and social safeguards not only lessen the risk of popular backlash against the Bank’s activities, but they also show that the Bank is committed to the rights and wellbeing of the communities it is intending to serve. The EBRD’s Environmental and Social Policy needs to move beyond lofty language and clarify the Bank’s specific responsibilities regarding human rights protections. In addition, from both a risk mitigation and a community-centered perspective, the Bank could move further toward sustainability by integrating a human rights due diligence component into its policy so that it can avoid harmful investments early on and pursue those that are most promising for inclusive growth.

Furthermore, as our partners at CEE Bankwatch Network highlight, a public information policy rooted in transparency promotes local empowerment, facilitating communities’ timely access to information about investments that impact their lives. In modernizing this policy, the Bank must avoid unjustifiably sweeping business confidentiality provisions and incorporate extensive disclosure requirements across its entire portfolio, including for financial intermediary sub-projects and projects involving financing facilities. These elements reinforce the public’s right to information and can encourage active participation in the development process.

Moreover, sustainable development is only possible when communities have access to an effective independent accountability mechanism that can hold the Bank accountable for adverse impacts, ensure institutional learning to prevent future harm, and provide remedy so that people are made whole. Unfortunately, we have seen how the current policy of the EBRD’s Project Complaint Mechanism has saddled it with a hopelessly unsound structure and process.

In response to a complaint we supported with partners in Mongolia over large-scale mining ventures, the PCM applied a flawed methodology to its investigation, producing a compliance report that failed to acknowledge first-hand testimonials of the serious harms reported by traditional herders living near the mines. For herding families who had lost over 50,000 acres of pastureland to mining infrastructure, the report added insult to injury. This example stands in contrast to the sustainable development benefits that can be achieved when a mechanism’s policy incorporates principles of fairness, predictability, and independence, as evidenced by our parallel case in Mongolia with the International Finance Corporation’s Compliance Advisor Ombudsman. Through a complex negotiation process, this case produced an independent report that confirmed many of the herders’ concerns and two negotiated agreements that included scores of practical commitments to resolve them.

Taken together, these policies lay the groundwork for good practice and the implementation of a development model that is centered on the rights of impacted communities, transparent operations, and a responsibility to prevent harm and remediate it when it occurs. Although the EBRD will continue to face challenges and opportunities with the shifting development landscape, the policy review presents an auspicious moment to secure its footing and future role in contributing to sustainable development.

Revealed: EIB supporting major Israeli environmental offender

The European Investment Bank (EIB) doesn’t miss a chance to boast about its green credentials. The world’s largest lender does have some of the more stringent social and environmental standards among international financial institutions, but sometimes it seems there are light years between the bank’s policies and the situation on the ground.

Such is the case with Israel Chemicals (ICL), a multinational corporation that is widely known in Israel for its dubious environmental track record.

Israeli environmental groups have long warned about the toll ICL’s subsidiaries in Israel have taken on the local environment – be it the contribution of Dead Sea Works to the rapid and continued decline of the Dead Sea, or the years-long pollution of the popular Bokek stream from Rotem Amfert’s factories in the Negev desert.

Dead sea mining (Photo by Ranbar CC-BY-SA-3.0)

Ashalim stream (Nahal Ashalim), Judean Desert, in 2017 was contaminated with toxic water (Photo by Yuvalr CC-BY-SA-3.0)

Nurtured on EU public money

Rather than becoming a green and clean business, last year ICL seems to have managed to break its own record of disregard to the environment.

Over the past decade the EIB has awarded ICL two generous loans aimed at supporting research, development and innovation related to fertilisers and speciality chemicals in the company’s different facilities in Israel and abroad. Among their stated objectives, these investments – totalling more than EUR 230 million – were supposed to help improve the so-called environmental performance of ICL’s existing products and processes.

But rather than becoming a green and clean business, last year ICL seems to have managed to break its own record of disregard to the environment. In June 2017, one of the wastewater pools in Rotem Amfert’s Mishor Rotem plant collapsed and a wave of highly toxic wastewater spilled into the Ashalim dry stream that’s located within a desert nature reserve, decimating the local wildlife, including a third of the local Nubian ibex population.

https://www.youtube.com/watch?time_continue=12&v=88Q3CHbGhec

EIB turns a blind eye

Bankwatch has obtained documents related to the two loans ICL had received from the EIB, and their analysis, summarised in a briefing released today, reveals that the bank has failed to assess and acknowledge the company’s environmental performance.

In fact, the EIB’s supposedly rigorous due diligence checks appear to have missed even the most obvious red flags. Since January 2013 the Israeli Environmental Protection Ministry has recorded dozens of environmental infringements in ICL operations across the country, and both ICL and Rotem Amfert have even been ranked by the ministry’s Environmental Impact Index among Israel’s top environmental offenders for several years.

The EIB’s supposedly rigorous due diligence checks appear to have missed even the most obvious red flags.

Yet, the EIB’s environmental assessment for the loan approved in November 2016 stated that “ICL has a sound environmental policy, including commitments to comply with legal requirements, prevent pollution, continual improvement, regular audits and annual report of its environmental performance.”

In response to Bankwatch’s queries, the EIB indicated that this assessment was based “on the situation that could be observed during the Bank’s appraisal visit in Israel, and on publicly available documents, such as for example the [Corporate Social Responsibility] report that is annually published by the promoter and was also discussed during the Bank’s appraisal visit.”

This response raises concerns that, despite the EIB’s policies, its evaluation of ICL relied almost only on information it had received from the company itself.

Similarly, the document that the board members received from the bank’s management before deciding on the loan, mentioned nothing about the two companies’ poor environmental record. In fact, it even concludes that ICL’s operational risk, assessed as “medium,” is “mitigated by the promoter’s compliance with stringent environmental procedures and stringent policies it has put in place.”

The EIB, as the EU’s financial arm, is obliged to monitor the companies it supports. Yet, the Environmental and Social Completion Sheet for ICL’s earlier project, which indicates that “the project has been implemented in line with EIB Environmental and Social Standards, applicable at the time of appraisal” also states that this assessment is based on ICL reports.

So it is also unclear whether ICL has notified the EIB of the Ashalim disaster – or the multiple initiatives for class action that followed, most recently by the ministry itself – even though the loan contract requires it to do. If it did, the bank has never indicated to Bankwatch that it had taken any measures in response.

A bigger problem

This case casts a serious shadow over the EIB’s appraisal mechanisms, and possibly also its oversight of the projects it finances. And it is of particular concern given that the same failures appear to characterise two successive and similar projects, or as the saying goes, “fool me once, shame on you; fool me twice, shame on me.”

… the same failures appear to characterise two successive and similar projects

The EIB’s loans to ICL were guaranteed by the EU’s funds under the so called External Lending Mandate, created to help the bank support sustainable projects outside Europe. Bankwatch has documented at least several projects covered by this instrument with questionable quality and performance in terms of transparency, human rights and environmental due-diligence.

In a recent communication on a new Neighbourhood, Development and International Cooperation Instrument, the European Commission presented a plan for a better alignment of the EU’s external action with environmental principles and sustainable development goals. Should this be enough to prevent similar operations as ICL loans it is yet to be seen.

With EU funds in Romania, where there is a will, there is a way

Originally published on People’s Budget

Since the accession of Romania to the European Union in 2007, the country had access to various funds made available to support the process of eliminating the discrepancies between Europe’s developed and least-developed regions. For Romania, European funds, mainly the Structural and Investment Funds, were and still are a fundamental instrument to strengthen the economic, social and territorial cohesion. Through eight national and regional programmes, Romania has been allocated EUR 30.94 billion from ESI Funds over the period 2014-2020. With a national contribution of EUR 5.63 billion, Romania has at its disposal a total budget of EUR 36.47 billion to invest in various areas.

Poor absorption of EU funds

For the 2007-2013 financial framework, Romania received EUR 19.7 billion from the European Union to be spent through seven sectorial operational programmes. But it was easier said, than done. By the middle of the financial period the absorption rate was 0.8% of the total amount allocated, meaning EUR 170 million and at the end of 2013 the rate of absorption reached 26.5%. Things seem to go at the same pace also in the current financial period and the data available confirms this situation – in February 2018 the absorption rate was at a level of 10.07% having spent almost EUR 4 billion from the total budget.

The explanation for this poor absorption relies in the excessive bureaucracy, low productivity, lack of personnel, the quality of the projects and, of course, the ongoing changes in regulations made by the management authorities. The lack of vision for development is another explanation for the failure of absorption of the funds available. Thus, for the 2014-2020 financial period, Romanian authorities are experiencing methods for improving the absorption and the use of EU funds will be based on a partnership agreement between European Commission and the Government of Romania.

Too good to be true? The story of Ciugud

Among the issues of poor absorption of European Funds, the example of Ciugud, in Alba County stands out but in a more positive way. Located in the western part of Romania, in the Transylvanian Plateau and a few kilometres from the city of Alba Iulia, Ciugud can be compared to many communities from developed countries across Europe. The evolution of the Ciugud commune started almost 20 years ago when the budget of the whole town barely covered the salaries of the few employees the local administration had or the gas bills for the local clinic and schools. Then, almost 2 600 people lived with the hope that their living conditions will turn out for the best.

In an interview for the national press, the mayor, Gheorghe Damian, remembered the initial situation of the village ‘In 2000, when I became mayor, our own revenues amounted to 70.000 RON (approx. 15,000 EUR) and we inherited a debt of about 300,000 RON (approx. 65,000 EUR). We could not pay our salaries to the City Hall, the public lighting was always cut from the lack of payment and we did not have money for the schools’ gas bills. We couldn’t even talk about an investment budget as any administration should have: meaning an operating budget and a development budget through which you could envision activities in the short, medium and long term in that community’.

Having this situation as a starting point, the mayor looked for alternatives anywhere. That’s when, in 2004, he decided to turn one of the pastures into an industrial area for investment. He explained that before taking this decision, the administration spent almost 50,000 RON (approx. 11,000 EUR) every year on cleaning works, because the pasture wasn’t used for intensive grazing anymore. Now, the industrial area of Ciugud houses various businesses in different fields with more than 700 employees, bringing to the commune’s budget an annual total amount of 2.5 million RON (approx. 540,000 EUR).

A small initiative was all it took for the Ciugud commune to start an intensive process of development for which European money was used and it came as a breath of fresh air for the community. So, in 2005, with the emergence of first pre-accession funds in Romania, the authorities from Ciugud put together some small projects, which were easily accepted and paid. They consisted in providing the City Hall with computers and software to improve their capacity and ease the future planning.

The transformation begins

After that moment, they realised the usefulness of European money and they began an ongoing process of writing projects and finding the proper financial instrument for them. Thanks to their continuous efforts, in 2007, Ciugud was approved the largest infrastructure project in the history of the county – EUR 7.5 million through which all the commune’s roads have been paved and 47 Km of sewage network and water network have been done.

But none of this would be possible without an ambitious and productive personnel. The public administrator of Ciugud City Hall, Doru Dan Pop confesses that ‘People are behind everything. It is important to have a human resource capable of implementing this kind of projects’. Having discovered the recipe of success, they kept on writing projects and finding new ways to attract European money and currently they represent the top tier of communities spending European Funds having over 70 approved projects and approximately EUR 27 million collected.

Anything is possible in Ciugud because not only they have paved 30 Km of agricultural roads which connect three communes, seven villages serving 2 500 hectares of land and 15 farms, but they went to the next level and installed solar panels and a micro-wind farm and the energy produced serves for the street illumination. This was possible through ‘a partnership between Ciugud commune and Polytechnic University of Timișoara, a project of 1 million EUR funded by the Norwegian Government’, the mayor explained and added that another group of solar panels and micro-wind farms will be installed to produce the electricity needed to cover the consumption of public institutions and public lighting throughout the commune. And the investments don’t stop here – the community has a several kilometres long bicycle track that crosses a part of the commune, free wi-fi is available in all public spaces and the parks have also been modernised through European money.

This story represents one of the few successful examples in Romania but should serve as an inspiration for all the mayors and representatives of the Romanian authorities. Nobody says it’s going to be a smooth sailing when dealing with accessing European funds, but it is important to have well-prepared personnel, a vision for sustainable development and last, but not least, a desire to make positive changes in your community.

Bulgarian authorities, forced to think about Just Transition

Originally published on Just Transition

Bobov Dol Mining, owned by controversial entrepreneur Hristo Kovachki, announced last week it would close down the Bobov Dol underground mine employing 400 people. The closure procedure is scheduled to start July 16 and finish by the end of the year, by when all employees would be let go.

The closure is happening because production costs far exceed purchase prices and there is a shortage of qualified specialists in the region. Local authorities were nevertheless surprised by the news: it is common practice in Bulgaria to keep unprofitable mines going, in part to silence the unions, in part to benefit further from state subsidies.

The closure of Bobov Dol is happening without any planning as to what might happen to the workers and region at large once the mine is gone. The area where Bobov Dol is located is not rich, neither does it have a diversified economy – it’s been dependent on coal for decades. This spells trouble if there is no planning. The case of another Kovachki-owned mine in the same region, Babino, which closed last year similarly without any contingency plans gives further reasons to worry.

When nearby Babino shut down, 650 miners lost their jobs. All the workers heard when they were made redundant was that they should go to the unemployment office – needless to say the assistance they got there is not enough to cover for the costs of a normal family, nor does it last forever.

The Bobov Dol municipality is so worried the same thing will happen to another 400 miners that they called a press conference to express their concern.

“We live in a country where politicians have no vision for the development of areas like ours”, said the mayor of Bobov Dol municipality, Elsa Velichkova.

Interviewed by us, the mayor wondered why there was no dialogue between the various institutions that should deal with the aftermath of mine closures and come up with plans for the economic diversification of coal regions.

At the end of May, mayor Elsa Velichkova joined a study trip organised by CEE Bankwatch Network and Czech NGO CDE to the coal mining region Usti in Czechia.

Mrs. Velichkova, together with other decision-makers from CEE, discussing Just Transition in Usti region.

There, Mrs. Velichkova had the chance to see how some Czech towns are preparing mitigation plans for employees of the coal sector and their families even before the mines are closing; instead of trying to slow down artificially the closure of coal mines, some Czech authorities are working on preparing the people for the inevitability of mine closures and working together with them to create a post-coal future. At the end of the study trip, Mrs. Velichkova said she would stay in touch with her Czech colleagues and insist on similar transition plans to be prepared for coal-dependent regions in Bulgaria.

First opened in 1891, Bobov Dol used to be one of the main sources of coal in southwestern Bulgaria, but its prime has passed long ago.

About 45% of electricity in Bulgaria comes from coal, mainly locally-produced lignite with high sulphur content. More mine closures will come and it’s high time for Bulgarian authorities to start taking Just Transition seriously. That Mrs. Velichkova does so is very encouraging.

China, the Western Balkans and the EU: Can three tango?

Originally published on Euractiv

While the EU has kept busy with its economic and political crises, China has become a main financier in the eastern part of the continent.

China’s far-reaching Belt and Road initiative to create mega connectivity corridors on land and by sea, including from China to Europe, is made viable with Chinese financing and development of big ticket infrastructure projects in wider Europe’s key strategic transport and energy sectors.

But there’s more going on. China is financing at least five new coal plants in the Western Balkans that would not qualify for financing from multilateral development banks and export credit agencies, which have stepped away from coal in the last years.

China is increasing its ties not only with the Western Balkans but also with investment-hungry eastern EU member states, mainly through a China-led platform, the so-called Central and Eastern Europe-China “16+1” framework, that comprises annual signing of trade agreements.

In the rush for Chinese cash, the Western Balkans are agreeing to business deals that could prove problematic for the countries’ path towards EU accession.

The trouble is, there are insufficient mechanisms to ensure that Chinese investments in the Western Balkans adhere to EU standards. In the Western Balkans, not yet members of the union, the EU has fewer tools at its disposal, and those which it does have, it does not use sufficiently.

Take for example the nine or so new coal-fired power plants planned by Western Balkan countries at the moment. Of these, at least five – Kostolac B3 in Serbia, and Tuzla 7, Banovići, Gacko II and Kamengrad in Bosnia-Herzegovina – are expected to involve Chinese companies and receive financing from the China Exim Bank, the Industrial Commercial Bank of China and potentially other Chinese banks.

Not one of them is guaranteed to be in line with the EU’s current pollution control standards, the so-called LCP BREF. The environmental impact assessments are generally of low quality and all the ones done so far are being challenged in court.

Only one of the projects has been subject to a tender procedure which appeared to be regular. For Kostolac B3 in Serbia there was none at all – with Serbia and China instead signing an intergovernmental agreement to waive this requirement.

The Chinese loans discussed so far would be backed by state guarantees with unknown conditions, thus potentially clashing with the countries’ state aid commitments under the Energy Community Treaty. In the case of Kostolac B3 the Serbian state actually took the loan instead of the state-owned company Elektroprivreda Srbije (EPS), thus shielding EPS from any real risk. Other forms of state aid eg. subsidies for coal mining also plague the sector in these countries.

Even with the state aid, most of the projects are unlikely to be profitable. Their proponents are too optimistic about likely electricity sales prices and coal production prices, and hardly any of them have taken future CO 2 costs into account. Adding even low CO2prices for plants like Kostolac B3 and Gacko II results in the plants being unprofitable.

One Chinese-financed coal plant, Stanari, in Bosnia-Herzegovina, has already been built in the region and started operating in 2016. EU pollution control legislation for new plants has been updated twice since the Large Combustion Plants Directive which Stanari was designed to comply with, rendering it out of date before it even started to operate. In May 2017 media reported that project promoter EFT may sell the Stanari plant or a share in it to Croatia’s state-owned Hrvatska Elektroprivreda, raising questions about its profitability.

Current Chinese financing in the Western Balkans’ energy sector is enabling non-compliant coal projects to thrive, thus putting European regulatory harmonisation at risk.

At the same time, the EU and the Western Balkans are caught in a chicken-and-egg situation: The EU has not been able to offer a quick enough accession perspective to motivate the Western Balkans countries to comply with EU law, while the countries have not made enough progress for the EU to promise rapid accession.

The only way to solve this conundrum is for the EU to step in and ensure its legislation is adhered to when Chinese investors offer deals to the Western Balkans.

At this week’s EU-Western Balkans summit in Sofia, Bulgaria, the EU is expected to reaffirm its commitment towards its Western Balkans partners and strengthen connectivity with and within the region. This follows its Western Balkans Strategy issued on 6 February this year, which constituted the EU’s clearest statement in years on the prospects for accession.

This summit constitutes a clear opportunity for the EU to assert its position and clearly let China and the Western Balkans countries know what it expects.

To ensure the Chinese-financed projects in the Western Balkans are in line with EU standards, the EU has several tools at its disposal. For one, it has funding, which can be redirected, increased or withdrawn. It also has the Energy Community Treaty (a mechanism to integrate energy markets of pre-accession countries), which needs to be strengthened to make enforcement more credible. And it could also develop mechanisms to assist countries – for example in case of energy shortages – or to dis-incentivise them from certain policy routes – for example limitations on imports of energy from sources that don’t comply with EU law.

The Western Balkans’ governments will only become interested in EU standards when they see there are serious consequences to not following them and when they see what they can gain by doing so.

It is very much in China’s interest too to be more interested in adherence to EU standards, however, as failure to do so will eventually result in more and more doors being closed to its involvement in projects in the EU. Declaratively, China is committed to doing so, but in reality we have found its regulators and banks too ready to believe the assurances of Western Balkans’ governments without carrying out sufficient independent due diligence.

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