Blog entry

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.

Mounting pressure to revoke permit for the planned thermal power plant Ugljevik III

More evidence against Ugljevik III

Following the complaint submitted in December 2014, the Energy Community Secretariat launched the second in a three-step infringement procedure last week, confirming once again that Ugljevik III’s permitting process violated the EU’s Directive on Environmental Impact Assessment.

Local authorities have two months to respond to the Energy Community Secretariat’s reasoned request and improve the situation.

What is wrong with Ugljevik III environmental assessment?

The plant’s environmental study is lacking most of the important elements needed to assess the plant’s likely impact on the environment. Most alarmingly, the data on emissions of SO₂, NOx and dust from the plant are demonstrably false.

Ugljevik III is also currently under examination by the Espoo Convention Implementation Committee due to Bosnia and Herzegovina’s failure to notify neighbouring countries about the plant’s transboundary impacts.

However, none of this was picked up by the ministry approving the study, which goes against the Republika Srpska law and Bosnia and Herzegovina’s obligations under the Energy Community Treaty.

In July 2017 the project seemed to reach a dead end when the Supreme Court of the Republika Srpska Entity cancelled the environmental permit for the project, but the Ministry of Spatial Planning, Construction and Ecology responded by issuing another permit without repeating the environmental impact assessment process. This new permit is now being challenged in court by the Center for Environment from Banja Luka.

Unmatched levels of pollution

It is no big surprise that the authorities are trying to play down the plant’s impact on the environment, considering the jaw-dropping levels of pollution from the existing Ugljevik power plant at the same site:

A recent report by the Health and Environment Alliance reveals that one single 300 MW plant at Ugljevik III emits as much SO₂ as all of Germany’s coal plants together.

In 2013 alone, Ugljevik spewed into the air 154,385 tonnes of SO₂ – an unmatched amount for Europe. Even if the new plant had lower emissions, associated activities such as the coal ash disposal and lignite mining at the Delici, Peljave-Tobut, Baljak and Ugljevik-Istok open-cast mines, would cause severe dust pollution for the communities far beyond the plant.

International financiers’ policies at risk

The new plant is promoted by Russian billionaire Rashid Sardarov’s Comsar Energy and planned to be constructed by the China Power Engineering and Consulting Group Corporation (CPECC).

China Development Bank representatives were present at the signing of an agreement between CPECC and the Republika Srpska authorities, indicating that the bank may be interested in financing. This, however, has never been confirmed since late 2014. With mounting evidence against this project, it would not serve the bank’s reputation and commitment to abide by the Chinese Green Credit Directive.

Moreover, a recent guideline regulating Chinese overseas investments makes it clear that there should be no financing of projects that “do not comply with standards relevant to environmental protection, energy consumption and security established in the destination country”, which is precisely the problem with Ugljevik III.

Given the country’s lack of convincing arguments in the first phase of the infringement procedure, it is hard to imagine how they could demonstrate the legality of Ugljevik’s environmental permit now. The country’s addiction to coal needs treatment, and admitting that it has a problem would be a logical start.

The EU’s flagship project lacks climate assessment

While the EU portrays itself as a leader of the Paris Agreement, its financial arm – the European Investment Bank (EIB) – approves another loan to the controversial Southern Gas Corridor project without proper climate impact assessments.

A EUR 932 million loan to the Trans Anatolian gas pipeline (TANAP) goes against the EU’s public stance on pursuing climate action. Only a month ago, the EU ministers emphasised the unprecedented urgency to step up global efforts in halting and reversing climate change, and committed to lead the EU to full compliance with the Paris Agreement.

Going the extra mile

To comply with the Paris Agreement, investments in fossil fuels efficiency are not enough – limits are also needed on consumption. In 2016, Oil Change International calculated that the potential carbon emissions from existing oil, gas, and coal operating fields and mines would take us beyond 2°C of warming, whereas we must aim for well below it. The organisation recommended governments and companies to conduct a managed decline of the fossil fuel industry.

EU’s ‘best’ practice

Given this understanding about the urgency of the problem, it seems obvious that the extraction, import and burning of new fossil fuels should be preceded by an elaborate analysis of the potential climate impacts. It is expected that the EU and its institutions would conduct thorough assessments and wide consultation with the public prior to embarking on new fossil fuel projects.

It comes as a great disappointment that none of these steps were taken with regards to the Southern Gas Corridor, the largest fossil gas project that Europe is currently pursuing.

The EU’s flagship project goes unchecked

Source: http://www.europarl.europa.eu/sides/getAllAnswers.do?reference=E-2016-007932&language=EN

The European Commission, a strong supporter of the project, admitted that it has not undertaken any climate assessments of the Southern Gas Corridor. The EIB conducts routine carbon footprint assessments of its loans but keeps the findings confidential before a loan is approved by its Board. Even after that, assessments are not made widely available.

Obtained through a personal request, the assessment of the Southern Gas Corridor proves to be weak and inadequate, not to mention its technical language makes it inaccessible for the general public. The report presented for the approval of Member States representatives was limited to the western section of the Southern Gas Corridor – the Trans Adriatic Pipeline – and covered only the first stage, until 2023. By then, the pipeline will have transported 10 billion m³ of gas annually. According to the project ESIA, the design pressure of the pipeline potentially allows to double that volume with two additional compressor stations.

Pushing for adequate assessment

In the assessment, the scope of calculated emissions was reduced to the bare minimum: it failed to include emissions related to the extraction of gas from the Shaz Deniz gas field and its transportation through other parts of the corridor, as well as emissions from the end use, such as combustion in power stations. Moreover, it used an outdated warming potential factor for methane, four times lower than what is stated in the latest IPCC report.

It was not until Bankwatch presented its own emissions calculations for the project that the Bank updated its assessment to account for the missing emissions.

Moving in the wrong direction?

Instead of calculating how much more fossil fuels we can afford to burn, we should focus the debate on ways to limit consumption.

Does this gas project compromise our chances to remain within the 1.5-degree warming limit? The EIB offers unconvincing reassurance: “The SGC should not have any direct effect on Climate Change, because it is an alternative source of gas and does not intend to cover any new demand.”

Download the EIB’s greenhouse gasses assessments.

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