Blog entry

The loan that made sense until it didn’t

For a country with unstable finances, Serbia seemingly burns cash on its ambitious coal plans, even if it means throwing the country further into debt. The Serbian government is pursuing the expansion of a lignite mine and a new 350 MW plant at Kostolac, as loans pour in from both the east and west. China ExIm Bank is supporting coal infrastructure, namely the construction of the new Kostolac B3 plant by the China Machinery and Engineering Corporation (USD 608 million in 2015) and desulphurisation at the existing blocks of Kostolac B (USD 293 million in 2011).

In addition, the World Bank and the European Bank for Reconstruction and Development (EBRD) have lent to the Serbian coal giant, Elektroprivreda Srbije (EPS) – although these investments tend to be obscured as policy or restructuring loans.

Most recently in April 2018, the World Bank approved a USD 200 million policy loan with one of its aims being the improvement of the financial sustainability and efficiency of public sector energy enterprises. While these loans promise ambitious reforms of the energy sector and of EPS’s corporate management, there is little sign that these factor in the costs of coal as a stranded asset or put Serbia on a low-carbon transition track.

Because of doubts about the EBRD’s 2015 restructuring loan to EPS , Bankwatch and its Serbian member group CEKOR submitted a complaint to the bank’s grievance body, alleging that the bank violated its environmental and social policy. The Project Complaints Mechanism (PCM) registered the complaint on May 10. EPS has a long history of receiving EBRD loans and then being hit with subsequent PCM complaints – in fact no other EBRD client has been the subject of so many PCM investigations.

While the EPS restructuring loan should have prepared a coal-heavy company for the realities of adhering to stricter EU legislation, it appears to have freed up resources so that the company can extract and burn even more coal, by adding the 350MW Kostolac B3 power plant to its portfolio and expanding the Drmno lignite mine capacity from 9 to 12 million tonnes per year production. The latter is even being performed without an environmental and social impact assessment, which is a breach of EBRD policy.

The history

In May 2014 EPS woke up to a nightmare. The biggest open cast lignite field, Tamnava West, had turned into a lake overnight, after severe rainfall caused the Kolubara river to spill into the massive hole. Excavators and other mining machinery worth tens of millions of euros were deep underwater.

Two-thirds of Serbia’s coal production was lost when open-pit mines were flooded and Serbia was forced to import energy to avoid power outages. Overall damages in the power sector were estimated at nearly EUR 500 million. Serbia’s energy utility, Elektroprivreda Srbjie (EPS), was on its knees.

To anyone aware of the correlation between coal burning and climate change – manifesting itself as severe floods, among other natural disasters – this was an eye-opening cause-effect reaction.

The World Bank approved a USD 300 million loan to the utility for dewatering the mine, and coal production was partially resumed in December 2014.

Meanwhile, the European Bank for Reconstruction and Development (EBRD) also approved the restructuring loan to EPS with the stated purpose “to alleviate the deteriorating cash situation created by the unprecedented and catastrophic floods in Serbia in 2014”. The board document, however, was more candid: freeing up resources to allow the Company to focus on and boost the implementation of its long term capital expenditure program.

To an untrained eye, this statement would probably not ring many alarm bells, but considering EBRD’s long history with EPS, consisting of no less than five loans since 2001, amounting to EUR 315 million [1], the Bank should have known what the utility’s “long term capital expenditure program” really means.

According to the 2016 Energy Strategy of Serbia, in addition to prolonging the life of existing coal plants, EPS is planning several new lignite power plants: Kostolac B3, Nikola Tesla B3, Kolubara B, and Stavalj. While it is unlikely that all of these will go, EPS clearly prioritises Kostolac B3 in the implementation programme for the energy strategy and has not publicly announced any cancellations.

In fact, construction of new coal generation capacities is proposed as a GHG emission reduction measure in Serbia’s Second Report to the UNFCCC.

Coal stains on EBRD’s Green Economy Transition

For a bank that should be limiting its lending for coal power, a requirement of its 2013 Energy Sector Strategy which also commits it to a “green economy transition”, the EBRD should think twice before freeing up EPS resources to carry out its well-known ‘long-term plans’. But not the EBRD – the bank has systematically downplayed the information submitted by NGOs regarding EPS’s lack of a long-term vision for the development of the sector, its overreliance on lignite, and no plans to decarbonise. It also does not seem to take the six complaints submitted to the bank’s compliance mechanism (PCM) as a serious indicator of EPS’s failure to follow EBRD environmental and social policy.

That Serbia and EPS depend so heavily on coal should signal significant risks for the economy and society, and the EBRD had a great opportunity to deliver on its commitment to the low-carbon transition for its countries of operation by for example agreeing with its client on a climate audit or a decarbonisation plan upon approval of the corporate restructuring loan.

Is this opportunity missed altogether? The ball is in the bank’s court and even if it has lost its leverage to influence EPS’s lignite expansion plans, the EBRD better not miss the opportunity to analyse thoroughly how its policy applies to corporate level loans in the future.

Notes:

[1] Project Summary Documents (PSDs)

New wave of protests against the Nenskra dam

Since the Nenskra project’s launch in 2015, local Svans have been continuously raising their concerns over the 280-megawatt hydropower plant (HPP) at their doorstep. The demonstration in Chuberi comes after a series of preceding events in Tbilisi, Oni, and Mestia in the past two months.

Today, we gathered in Chuberi to support and show solidarity to locals who are protesting against the Nenskra HPP. Unfortunately, we are stuck in the past and, instead of shifting to modern technologies, the country pushes for what the modern world has rejected long ago. We say ‘No’ to big dams, as in the long run it is much more profitable for locals to keep the nature than destruct 400 hectares of forest for one single project. That is why we are saying ‘No’ to HPPs in Svaneti and in Georgia – they destruct our cultural heritage and nature.

Dato Gulbani, a protester in Chuberi.

The stakes are high. A billion-worth Nenskra project, backed by public institutions, such as the EBRD and ADB, will flood communal lands and vast territories in Svaneti. Despite the magnitude of such pervasive construction, potential economic and environmental impacts have not been properly assessed.

https://www.facebook.com/liberalimagazine/videos/1794612247268947/?t=0

Previous attempts by the Deputy Minister of Internal Affairs and the Deputy Minister of Economy to address public disapproval of the hydropower developments in the region did little to bring about a needed change and propose any workable solution.

Unable to influence local decision-makers, Svan representatives appeal to public financiers that account for 75 % of all Nenskra funding. They will address the EBRD during the annual meeting in Jordan to challenge the bank’s involvement in the Georgian hydropower sector.

I will tell the banks to stay away from such proposal as they threaten to destruct Svaneti. Wrecking nature in Svaneti means intervention in people’s lives and losing strategic zone for Georgia along the conflict zone with Abkhazia.

Manana Saghliani, the leader of Svan Lalkhor.

Tightening EBRD policies to counter Ukrainian agro giant

People first

Despite securing over half a billion in public investments from the EBRD, EIB, IFC, and 42 % of all national agri-subsidies, MHP continues to insist on business-as-usual relationships with the public. It enforces perfunctory compliance with national legislation on selected issues, which is hardly up to par with the EU and EBRD standards. More than two years after receiving EBRD consultant’s recommendations, improvements are few and far in between – illustrating the need for better enforcement on the bank’s side.

“We’ve complained to decision-makers at all levels of the government, including the president of Ukraine, so many times that we’ve lost count,” shared one of the activists Nina Martynovska, a deputy council in a potentially affected village.

Fruitless attempts of the locals to move the needle raises an important question whether people are still the focus of public funds. Numerous problematic concerns blossoming around the MHP project – from human right abuses to environmental and health threats – remain unresolved, left at the discretion of the MHP management.

Long-lasting footprint

The foul odour of manure and deteriorating air quality have been accompanying the MHP facilities expansion. Apart from more obvious, immediate effects of intensive livestock production at their doorstep, local communities in Vinnytsia get increasingly concerned with long-term impacts on their health and the environment.

MHP is more than a poultry farm – it represents the whole production chain of activities, ‘from field to the fork’, growing crops to incubating eggs to raising chickens. Such omnipresent activities in the region have significant environmental and social impacts and, therefore, necessitate a comprehensive and participatory Environmental and Social Impact Assessment (ESIA), as outlined in the EBRD’s Performance Requirements.

The right to know

MHP conflicts with communities exemplifies the EBRD’s unnecessary prioritisation of business interests over accountability and transparency. The Bank heavily guarded environmental and social information that was, on the other hand, freely given by its sister institutions – the IFC, EIB, and export credit agency Atradius.

Although the EBRD’s 2014 Public Information Policy (PIP) brought much needed innovations in terms of information disclosure, it did not fully enable people to realise their right to environmental information – especially for Category B projects, such as the MHP, which supposedly have ‘less adverse’ environmental impacts.

Prioritising human rights

The EBRD policies already include some strong human rights safeguards, but the bank’s role and specific commitments to human rights protection remain declaratory and vague. For one, they were insufficient to protect affected communities and local activists from intimidation and physical harassment. Two, they do not ensure inclusion and safe participation of people affected by the activities of the bank’s client.

The EBRD needs to strengthen its human rights due diligence for projects of both categories – A and B – and make an explicit reference to the mandate to promote human rights. Without a safe environment where people can speak freely, meaningful participation is not possible.

Zeroing in on safeguard policies

The controversial MHP is not a standalone case. Multiple hydropower development projects in Georgia and Western Balkans also abused inadvertent flaws in the EBRD safeguard policies and/or their implementation. By closing loopholes and demanding compliance from its clients, the bank can effectively discourage the misuse of public funds.

Over to you, EBRD.

EU should ensure sustainable Cohesion Policy

Originally published in EUObserver

Whenever Europe is tasked with finding agreement on its next seven-year budget, the inevitable horse trading that ensues is always acrimonious, with disputes almost guaranteed about how – and how much – money should be spent in its less developed regions, the recipients of so-called Cohesion Policy funds.

With EU ministers set to circle the wagons on 12 April and kick off negotiations about the Cohesion Policy after 2020, the problems that the General Affairs Council must solve are no less treacherous: the looming Brexit will result in a loss of revenues for the overall European budget; defence and migration issues have member states east and west at ends; and reshuffling the way money is distributed will re-open the debate on sharing sovereignty demanded by Brussels.

So if ever there could be a panacea for ending this infighting, EU ministers must call for a strong and sustainable Cohesion Policy – guided by principles of democratic oversight, transparency and accountability. Doing so will mean that public money is not misused and that the many challenges faced by all Europeans are addressed.

Key instrument of the energy transition

One of the most pressing challenges for Cohesion Policy is the transformation of the carbon-intensive energy systems in central and eastern Europe in order to ensure that the EU meets its climate objectives.

As the European Parliament recently pointed out, the EU budget beyond 2020 should be ‘fit for this purpose’, meaning that at least 30 percent of spending should be dedicated to climate action.

With the European Council having invited the commission to present by early 2019 a strategy for greenhouse gas emissions reductions in the long term, pressure is increasing on the EU to demonstrate its willingness to honour the pledges of the Paris Agreement. To do so, recent figures estimate that the EU should aim at reducing its emissions by 65 percent by 2030.

Setting the rules of Cohesion Policy properly can ensure the EU takes on strong climate ambitions.

Measures like an obligatory check on whether every new EU-backed investment is ‘climate compatible’ with EU-mandated National Energy and Climate Plans would go a long way.

Also, giving the public more of a say in how energy investments are made can also play an important part in speeding up this transformation.

While there is an overwhelming demand from individuals who want to both produce and consume their own energy, and as well communities after locally-owned clean energy projects, big companies and governments in central and eastern Europe favour outdated, centralised models of fossil-based energy production. This needs to change.

Not less, but more

Too often Cohesion Policy has been used to support detrimental or unsustainable investments. The response, however, should not be to reduce the amount dedicated to Cohesion Policy, but rather focus on more effective, relevant and transparent spending.

With the scandals regarding the use of EU money, Cohesion Policy needs to be more accountable. Member states should insist on the effective application of EU law, for instance by strengthening the commission’s complaints system in line with the EU Ombudsman’s recommendations, so that citizens have proper access to justice.

In addition, national ombudsmen could be given a role in the process, with the commission legally required to act on their findings or recommendations regarding how cohesion funds are spent.

This is a crucial condition to better spend the money, while fighting euroscepticism by showing that the EU is ready to be transparent when it comes to spending.

Unique opportunity

Another way to ensure the correct use of cohesion funds is to make legally enforceable the so-called ‘partnership principle’. This would mean that all those with a stake in how cohesion funds are spent – like local businesses, trade unions and civil society groups – are included in planning, monitoring and evaluating cohesion investments.

Finally, Cohesion Policy too often benefits big players and does not support enough local and smaller investors. Targeted technical assistance funding, tailored to the needs of smaller projects and non-professional investors would be a way to address this flaw.

To make sure that the transformation leaves no-one behind, these solutions should facilitate access to capital for prosumers and community energy projects, while offering solutions to tackle energy poverty among the most vulnerable.

On 12 April, ministers have a unique opportunity to lay the groundwork for a renewed Cohesion Policy that reconnects Europe to its citizens.

Seizing this opportunity is the only way to create a framework that will unlock innovative financing and scale up the citizen-led clean energy transformation – surely something that all can agree on and which will rise above the expected disagreements.

Planned Gacko II lignite plant in Bosnia-Herzegovina likely to make losses, shows new analysis

State-owned utility Elektroprivreda Republike Srpske, together with China Machinery and Engineering Corporation (CMEC) and Emerging Markets Power Fund, plans to build a new 350 MW lignite power plant in Gacko, near the town’s existing plant, and in December 2017 a Memorandum of Understanding was signed to move the project forward.

As is too often the case in southeast Europe, there has been no convincing analysis proving that this plant is needed or that it would be the best way to provide Bosnia-Herzegovina’s energy supply in the coming years.

Now this new analysis by economist Damir Miljević shows that fatal flaws in the input data make it highly likely the plant will generate losses. Three out of the main data inputs for the official feasibility study – the price of coal, electricity sales price, and the price of CO₂ – are unrealistic:

A realistic price of coal is mentioned in the study as just over EUR 18 per tonne – yet the amount used in the calculation is much lower, around EUR 13.3 per tonne.
The Study foresees export of all the electricity generated, at a price of EUR 50 per MWh, except in exceptional cases when 30% would be sold on the domestic market at EUR 19.90 per MWh. There no evidence that the electricity would find a market and that it could be sold at this price – which is higher than the real export price in recent years. Moreover, the scenario including 30% of electricity being sold domestically is not even examined in the calculation – if it was it would show that the plant is unprofitable.
A CO2 price of EUR 5 per tonne is mentioned in the text, but not included in the feasibility calculation. Including even this very low CO₂price in the calculation would take the plant into the realm of unprofitability.

The analysis concludes that although the official feasibility study for Gacko II claims it would generate profit of around EUR 23 million per year, with more realistic input data, a loss of minimum EUR 1.15 million per year looks more likely.

The fact that a coal plant in southeast Europe is expected to be unprofitable should not come as a surprise to anyone who has been watching the sector for a while.

Slovenia went ahead with Šoštanj 6 in spite of warnings about its profitability, and ended up in with massive losses for the state-owned TEŠ company – EUR 47 million in 2016.

Croatia had a near-miss with Plomin C. It finally dropped the plan in 2016 after it failed to convince the European Commission that the project would not involve illegal state aid.

Deloitte, the consultants examining the feasibility of Montenegro’s Pljevlja II plant likewise had to do mathematical somersaults to make the project’s economics add up – and even then the Montenegrin government did not manage to convince the Czech Export Bank to provide a loan for the project. Now the project has been sidelined in favour of refurbishing the existing unit at the site, but it has still not been officially cancelled.

Unfortunately the governments in Bosnia-Herzegovina, Serbia, Kosovo, and Macedonia are still not learning from the mistakes of others. But with most of the projects being led by state-owned companies and backed by state guarantees or availability payments, it is the public purse that will end up footing the bill.

Money flows, rivers dry

It perplexes me why bankers investing in hydropower projects in the Balkans have been so short-sighted as to pour at least EUR 700 million (and probably much more) into hydropower projects that are seriously damaging nature and causing conflicts with local communities.

Finance is essentially a forward-looking enterprise: as a financier you are looking to future yields to cover the present investment. You are guessing the future value of money, and assessing the risks to find the best model for financing an endeavour or project.

It has long been recognised by companies and banks – at least in theory – that financial gains mean little without taking social and environmental impacts into account and looking at the real life consequences of financing decisions. The future of hydropower, even small scale, is not as green as it seems.

kopaonik national park in serbia - Bankwatch — Panorama of the Josanicka banja valley, seen from Kopaonik

Following field visits in Albania and Macedonia in 2017 to see the real-life impacts of projects already built, Bankwatch recently teamed up with local activists and visited 14 plants located within just 40 km² on the borders of the Kopaonik National Park in Serbia.

What we witnessed is uncontrolled development of hydropower that has damaged no fewer than three rivers. Even greater damage could be done by at least another three plants planned in the area. Half of the 14 plants* we visited were financed by Austria’s Erste & Steiermaerkische Bank, four by the EBRD and one by Sberbank.

The Samokovska river in the Kopaonik National Park is still in a pristine state above the Velež hydropower plant. But not for long, as 5.9 km of the river is to be put in a pipeline for the Samokovska reka 1 plant.

Cumulative impacts

Make no mistake, this is an industrial installation: tonnes of concrete poured in to stop once mighty rivers and most of the life circulating in them: fish, stone crayfish and thousands of smaller organisms that render our rivers alive. Once upon a time these rivers hosted fish species such as Mediterranean barbel, Chub, Gudgeon and Sabanejewia balcanica – all on the IUCN red list, the latter of which is strictly protected in Serbia.

The intake of the Vladici 1 hydropower plant, financed by Erste Bank

These plants are often called run-of-the-river: In reality they are anything but. Dams block the rivers’ flow and form quickly silted-up ponds. From these concrete obstructions, the water is put into pipes and diverted to the powerhouse further below. Between the dam and the powerhouse, a ‘biological minimum’ flow is supposed to be maintained. Once mighty rivers and mountain streams are turned into lifeless drainage channels.

So far we identified EUR15 million* pouring into the region for construction of the hydropower plants. This translates into 17.8 km of rivers put into pipes, and 9.2 km about to be, leaving river beds with low or no water during the dry months. This is in contravention of Erste’s rules that, among other things, require compliance with the EU Water Framework Directive, and stipulate that no adverse effects on critical natural habitats or critical freshwater resources are allowed.

Map of the area marking the stretches with reduced or soon to be reduced water flow

Local people report that the rivers are completely drying up on a regular basis.

Gobeljska reka flowing over the weir of the Samokovo hydropower plant - Bankwatch — What’s advertised: Gobeljska reka flowing over the weir of the Samokovo hydropower plant, financed by Erste bank, inside the Kopaonik National Park. Source: Investor’s website

Gobeljska reka flowing over the weir of the Samokovo hydropower plant 2- Bankwatch — And the reality: the almost dry riverbed of the Gobeljska river below the Samokovo hydropower plant intake.

Dry river bed downstream of the intake for the Vladići plant, financed by the EBRD

Dry river bed downstream of the intake for Vladići 1, financed by Erste

We visited the river in February when there were comparatively high water levels. However, even then, water levels were considerably lower downstream from the dams, sometimes going below the minimal requirements. For several of the plants it was obvious that even the minimal requirements were not complied with.

Sutanovina hydropower plant, financed by the EBRD - Bankwatch — Upstream from the Sutanovina hydropower plant, financed by the EBRD

Sutanovina hydropower plant, financed by the EBRD2 - Bankwatch — Downstream from the intake of the Sutanovina hydropower plant, financed by the EBRD

Fish passes

What hurts the most is the operators’ plain chutzpah in building and running the so-called fish passes. In theory, they are built to enable fish migration over dams. In practice, they are often intentionally blocked or require some serious aiming and jumping skills.

Blocked fish pass at the intake of the Sutanovina hydropower plant, financed by the EBRD

Blocked fish pass at the intake of the Klupci hydropower plant

Blocked fish pass at the intake of the Knezevici hydropower plant financed by Erste Bank

‘Waterfall’ entrance to the fish pass at the intake of the Vladici hydropower plant, financed by the EBRD

What can be done?

Three plants that we visited are still under construction: Samokovska reka 1, Planska and Marici. The trees and other vegetation along the riverbank have been mercilessly cut. The water pipes go under the river bed (at least in cases of Planska, Velež 1 and Kašići), which contradicts the provisions of the Serbian Law on Nature protection due to excessive disturbance of the ecosystem and water quality. Moreover, Samokovska reka 1, financed by Sberbank, is deep in the Kopaonik National Park. It needs to be re-examined whether putting 5.9 km of the river into pipes contradicts the nature conservation goals of the area.

Financing for at least these three can still be conditioned on addressing the violations of local laws and international standards.

Planska hydropower plant, under construction, financed by Erste Bank

Placing the pipes for the Planska hydropower plant in the riverbed of the Josanicka river, financed by Erste Bank

Marici hydropower plant, financed by Erste Bank. There is an abundance of water now, but no certainty that it will stay like this.

Samokovska reka 1 weir, deep in the National Park - financed by Sberbank — Samokovska reka 1 weir, deep in the National Park – financed by Sberbank

Samokovska reka 1 pipes going through the National Park

Towards better renewables

While it is positive that banks want to finance the much-needed transition away from coal towards renewable energy in Serbia, it is crucial to ensure that the cure is not worse than the disease. The number of small hydropower plants needed to make any serious contribution to Serbia’s electricity supply would be so large that virtually every mountain stream in the country would be destroyed.

Energy efficiency, as well as appropriately-sited wind and solar, have yet to get seriously off the ground in Serbia and could use support from Erste and other banks. Recently Erste, Unicredit and other banks teamed up to build Kosava wind farm, which is a step in the right direction.

The situation in Josanicka banja shows that while Erste and the EBRD both have reasonable environmental policies in place, improvements are still needed. In particular, projects financed by multilateral development banks via commercial intermediaries are causing problems, as the environmental assessment is to a large extent delegated to the commercial banks.

Cases like Josanicka banja show that either the knowledge, interest or capacity is lacking to carry out this work properly, and public oversight is non-existent because commercial banks do not disclose the names of the projects they are financing. Obvious deficiencies like the fish passes above also show that monitoring and enforcement of the existing standards is lacking.

As the EBRD undertakes a review of its environmental and social policy starting this year, it needs to find way to make sure that damaging projects do not slip through the net just because they are financed through intermediaries. Erste’s policies, meanwhile, would have prevented these negative impacts if properly implemented, so the emphasis needs to be on making sure that its policies are really implemented and enforced in practice.

* Known loans for hydropower plants visited, used for construction. Further loans might have been extended after the operations started.

#	Name	River	Financier	Loan in million EUR	In operation since
1	Kneževići	Jošanica	Erste	0.56	2015
2	Vladići 1	Jošanica	Erste	1.3	2015
3	Vladići	Jošanica	EBRD**	2.7	2017
4	Marići	Jošanica	EBRD, Erste	1.37 (Erste)	Under construction
5	Županj	Jošanica	Erste	1.47	2015
6	Planska	Jošanica	Erste	1.62	Under construction
7	Belci	Jošanica	Unknown	Unknown	2015
8	Kašići	Jošanica	Erste	2.03	2017
9	Samokovo	Gobeljska	Erste	0.56	2015
10	Šutanovina	Gobeljska	EBRD	See Vladići	2016
11	Klupci	Gobeljska	Unknown	Unknown	2012
12	Samokovska reka 1	Samokovka	Sberbank	3.32	Under construction
13	Velež	Samokovka	EBRD	See Vladići	2013
14	Velež 1	Samokovka	Unknown	Unknown	2017

** EBRD extended a single loan to Vladići, Marići, Šutanovina and Velež via the WeBSEDFF scheme. The loan is marked as completed.

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