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NGOs respond to EU aid for Ukraine: watch for the devil in the details

Prague — As the European Council on aid to Ukraine concludes today in Brussels NGOs caution that the 11 billion euros put forward by the EU come on terms which will not necessarily foster an independent, self-reliant Ukraine.

“It is very important that the world and especially the European Union stand by Ukraine right now,” comments Bankwatch’s executive director Mark Fodor. “Yet the financial package proposed by the EU relies too heavily on loans via institutions whose track record in both Ukraine and Russia has done more to benefit the domestic elites and foreign corporations than the general population. This sounds like just administering more of a medicine that has proven to suffocate the patient in the past.”

Out of the 11 billion euros that the EU said this week it could make available for Ukraine over the next years, around 8 billion would come in the form of loans provided by the European Investment Bank and the European Bank for Reconstruction and Development to specific projects to be proposed by public and private actors in the country.

The EU aid package has been explicitly linked to Ukraine agreeing to a macro-economic stabilisation package with the International Monetary Fund.

„The insistence by the IMF and EBRD on Ukraine’s quick signing up to macro-economic conditionalities is of concern as well,” adds Mark Fodor. „If the West is serious about wanting to support Ukraine’s independence, it should not be asking Ukraine to sign on to massive commitments while they have a Russian gun at their heads. Ukrainians should be allowed to make their own decisions when it comes to economic reforms.”

The EIB and the EBRD have been lending to both Ukraine and Russia for years. Russia is the biggest recipient of EBRD loans (net investment 23.7 billion euros), accounting for just under 30 percent of the bank’s portfolio. (1) Ukraine is the third largest recipient of the EBRD with a net investment of 8.7 billion euros (2). The EIB, which started operations in Ukraine in 2007, has invested 2.1 billion euros into the country to date.

„After two decades of seeing EIB and EBRD loans supposedly propping up integration and democratisation in Central and Eastern Europe, we fail to be convinced,” says Bankwatch’s Petr Hlobil. „What we see in practice is banks seeking profit investing in larger business ventures because they offer surer guarantee of return while offering puny support to smaller economic activities. Moreover, projects financed by both banks are often being rushed through without proper consultation of affected people and often under a veil of secrecy as regards the financial terms.”

Commenting on the EU aid package focus on gas diversification in Ukraine, Bankwatch Ukraine coordinator Iryna Holovko said, „While gas supply diversification is important, real savings can come from decreasing consumption via investments in energy efficiency and preventing energy loss in households and municipality buildings. That’s the way to truly reduce our dependency on Russian gas and to benefit ordinary people by reducing their energy bills.

„The energy sector today is run by the same people as before, so we fear that if the EU starts pumping money into the energy sector without safeguards (e.g., fulfilling Energy Community obligations, full transparency and public participation in decisions over energy projects), this aid would continue to benefit gas trading companies and connected structures, instead of helping to fix the critical situation in our energy sector and economy.”

Notes:

(1) For one example of how the EBRD has been financing some of the richest people in Russia, read this Bankwatch briefing on a loan to raiway company NPK:
https://bankwatch.org/publications/ebrds-policy-offshore-financial-centres-meaningful*

One of the beneficiaries of the EBRD’s Sustainable Energy Initiative has been steel giant Severstal, headed by its Soviet times manager, oligarch Alexei Mordashov:
http://www.foreign.senate.gov/imo/media/doc/55285.pdf (see p. 37)

*updated version available upon request

Russia’s representative to the EBRD, Elena Kotova, who played an important role in bank decisions, has been investigated for money laundering in the UK
http://www.businessweek.com/news/2012-08-16/russian-banker-s-money-laundering-case-risks-worsening-u-dot-k-dot-ties

(2) Country profiles for Russia and Ukraine here:

http://www.ebrd.com/pages/country/russia.shtml

http://www.ebrd.com/pages/country/ukraine.shtml

According to the EBRD’s own calculations from 2013 Transition report, faith in market-based solutions was lowest in Ukraine among all Eastern Europe, Caucasus and Central Asian countries after the recent financial crisis (see p. 15 of the report).

On the new Country Strategy for Russia: the strategy takes a very optimistic view of the present human rights situation in Russia.

https://bankwatch.org/bwmail/56/more-questions-answers-ebrds-new-country-strategy-russia

European Development Bank: Backward Step on Rights – Draft Policy Would Weaken Protection

(London) – The European Bank for Reconstruction and Development’s (EBRD) new draft Environment and Social Policy would fail to weed out abusive development projects, seven human rights and bank watchdog organizations said today in a joint statement. The bank’s consultation on the draft policy closes on March 5, 2014. It then has an opportunity to revise the policy before sending it to the bank’s board for approval in the coming months.

The draft policy removes some existing safeguards that protect against rights violations and fails to include other safeguards necessary for people affected by projects for which the bank lends money, Accountability Counsel, Amnesty International, ARTICLE 19, CEE Bankwatch Network, Center for International Environmental Law, Centre for Research on Multinational Corporations (SOMO), and Human Rights Watch said.The groups urged the bank and its member countries to reconsider this backward step.

“The European Bank for Reconstruction and Development should have firm policies so that countries and businesses seeking the bank’s loans know they’re required to respect human rights if they wish to work with the bank,” said Jessica Evans, senior international financial institutions advocate at Human Rights Watch. “Instead of using this opportunity to make sure the EBRD lives up to its longstanding human rights commitment, it appears to be retreating on this commitment altogether.”

The groups urged the bank to use this opportunity to put policies and systems in place to ensure that it will take all necessary steps to prevent it from causing, contributing to, or exacerbating human rights violations.

Headquartered in London, the bank is owned by 64 countries and two European Union institutions. With a cumulative business volume of US$ 117 billion, it is designed to help build open market oriented economies and promote private and entrepreneurial initiative. The EBRD works in 34 countries in Central and Eastern Europe and the Middle East, and invests mainly in private enterprises. The bank is also revising its public information and project complaint mechanism policies.

The groups cited several concerns with the EBRD’s draft policy revisions, including that:

  • The draft Environment and Social Policy (“the draft policy”)eliminates language that the “EBRD will not knowingly finance projects that would contravene country obligations under relevant international treaties and agreements related to environmental protection, human rights, and sustainable development;”
  • While the draft policy recognizes the responsibility of business to respect human rights, it does not actually require its business clients to live up to this responsibility;
  • The draft policy doesn’t require human rights due diligence to ensure that the bank does not support activities that will cause, contribute to, or exacerbate human rights violations. Existing environmental and social impact assessments rarely identify, assess, or address the full range of human rights impacts a project is likely to have, illustrating the importance of expressly requiring analysis of human rights impacts;
  • While the draft policy provides that the bank would not knowingly finance projects that involve forced evictions contrary to international human rights standards, it does not require the bank to take all necessary steps to become aware of potential forced evictions in projects that it supports, and its requirements for resettlement are inadequate;
  • The draft Public Information Policy does not commit the bank to disclose information on social and environmental appraisals of projects, as the presumption of transparency is undermined by an overly wide description of confidentiality, which would prevent disclosure in many cases; and
  • The window of opportunity for people negatively affected by bank projects to make formal complaints is far too limited.

“Our research on two bank-financed projects in Romania and Serbia showed that the bank did not adequately assess the risk of human rights violations before approving projects and failed to put in place effective measures to protect communities,” said Audrey Gaughran, director of global issues at Amnesty International. “The cost of these failures was forced evictions that, in Romania, left entire families homeless in winter and, in Serbia, forced Roma to live in metal containers.”

EIB suspends operations in Ukraine, EBRD ducks the question


Kiev – The European Investment Bank announced the suspension of all activities in Ukraine yesterday [*] following the most violent day since protests in this country began. In its turn, the European Bank for Reconstruction and Development declared it would “concentrate on the private sector” [**], hardly a meaningful stance considering the close links between government and the business sector in this country.

The EIB announcement came one day before the Foreign Affair Council of the EU made a formal decision about sanctions on Ukraine (this is expected to happen by end of day today).

„We commend the EIB for taking this bold step and acting as a decision-maker not a decision-taker on such an important issue where so many people’s lives and destinies are at stake,” comments Counter Balance’s Xavier Sol. „This is the kind of firm attitude that we would like to see from international financial institutions in the future, when faced with contexts where human rights are so clearly trampled.”

“The EBRD’s stance sounds little more than business as usual if we look at the reality in Ukraine,” says Bankwatch’s Fidanka Bacheva McGrath. “The Yanukovich’s ‘Family’ control of various sectors of the economy in Ukraine, most strikingly the coal business, is notorious. A large part of the private sector in Ukraine today is marred with corrupt and undemocratic practices, quite far from the safe haven the EBRD’s statement implies it to be.” [***]

“The EBRD cannot expect to get away with these kind of ambiguous positions for too long in the future, especially as it has started operating in North Africa and the Middle East where human rights have been systematically abused in some countries like Egypt,” continues McGrath. “The EIB’s current stance on Ukraine is a much more appropriate and convincing answer.”

Notes for the editors:

* Speaking during the EIB’s press conference yesterday in Brussels, bank president Werner Hoyer declared, “I think it would be completely the wrong signal to appear as being the ones who do business as usual in Ukraine while the people on the streets of Kiev…are being slaughtered.” Hoyer added that it is necessary that the EU speaks with one voice on Ukraine, and that the EU bank is a part of that single European voice.

** Speaking to Reuters today, an EBRD spokesperson said, “We have not suspended our operations in Ukraine, however, as of about three weeks ago, we are concentrating primarily on the private sector.”

***Read more about the links between the Yanukovych regime and the private sector at:
http://yanukovich.info/

Mind the environmental gap in south east European electricity market plans, say civil society groups


The new version of the EU-backed Energy Community Treaty must ensure that EU environmental and climate standards apply in countries that want to export electricity to the Union, says CEE Bankwatch Network in its submission to the public consultation on the review of the Treaty, which officially closes today [1].

The goal of the Energy Community is to ensure a single energy market across EU countries and the Western Balkans, Ukraine and Moldova, but campaigners here argue that failure to include more relevant EU laws in the revised Treaty will result in carbon leakage [2] or biodiversity loss from poorly sited energy infrastructure such as large dams.

Countries wishing to join the EU will also face nearly insurmountable challenges bringing their energy infrastructure up to par on time if they do not speed up now, Bankwatch argues.

As part of its public submission on the future of the Treaty after 2016 [3], Bankwatch says that in order to clean up the air, water and soil around cities like Tuzla, Pristina and Pljevlja which suffer from serious health costs due to coal electricity generation [4], and to preserve the outstanding biodiversity value of the Energy Community countries [5], the following EU environmental Directives must be included in the revised Treaty and the Treaty’s Secretariat needs to be provided with means to monitor and enforce their implementation:

  • Industrial emissions and the use of best available techniques;
  • Air quality and cleaner air;
  • Environmental quality standards in the field of water policy;
  • Management of waste from extractive industries; and
  • Conservation of natural habitats and of wild fauna and flora.

Bankwatch energy co-ordinator Ioana Ciuta said: “Many of the energy projects being planned are climate-damaging lignite power stations like Kostolac B3 in Serbia or Pljevlja II in Montenegro or Ugljevik III in Bosnia and Herzegovina. But such projects are not just bad for the climate and people’s health, they’re also riddled with attempts to bypass or bend tendering procedures.”

“Including the EU Directive on public procurement in the revised Energy Community Treaty would help rule out such instances of foul play,” added Ciuta.

For more information, contact:

Ioana Ciuta, Energy Co-ordinator,
ioana.ciuta at bankwatch.org

Pippa Gallup, Research Co-ordinator
pippa.gallop at bankwatch.org

Notes

[1] For more details about the extension of the Energy Community Treaty, read our media briefing here
https://bankwatch.org/sites/default/files/briefing-EnergyCommunityFuture-06Feb2014.pdf

[2] Carbon leakage occurs when there is an increase in carbon dioxide emissions in one country as a result of an emissions reduction by a second country with a more stringent climate policy.

[3] Bankwatch’s input to the consultation is available at
https://bankwatch.org/sites/default/files/comments-EnCom-consultation-05Feb2014.pdf

[4] Sources on coal and health in these cities:

Pristina, Kosovo:
http://siteresources.worldbank.org/INTKOSOVO/Resources/KosovoCEA.pdf

Tuzla, Bosnia and Herzegovina:
http://www.ekologija.ba/userfiles/file/Uticaj%20termoelektrana%20na%20zdravlja%20stanovnistva.pdf

Pljevlja, Montenegro:
http://www.greenhome.co.me/fajlovi/greenhome/attach_fajlovi/lat/glavne-stranice/2013/12/pdf/Uticaj_TE_Pljevlja_na_zdravlje_stanovnistva_Pljevalja.pdf
and
http://www.greenpeace.de/fileadmin/gpd/user_upload/themen/energie/GPI_Kohlestudie_technical_report.pdf

[5] The Energy Community Contracting Parties are Bosnia and Herzegovina, Kosovo, Macedonia, Albania, Moldova, Montenegro, Serbia and Ukraine

Leaked document: Doubling of electricity tariffs in Ukraine, condition for EBRD nuclear safety loan

The project through which the life time of old Ukrainian nuclear reactors is being prolonged with EBRD financing would not be economically feasible without a doubling of electricity tariffs, shows a document leaked to EurActiv last week.

The document disclosed by EurActiv has been prepared for the Board of Directors of the EBRD and outlines the conditions under which a 300 million euros loan to be provided by the EBRD to Ukrainian company Energatom would be viable. Among the conditions is a state guarantee that Energoatom’s tariff would be sufficient to repay the loan. Financial assumptions in the EBRD document show that a doubling of Energoatom electricity tariffs would be needed for that.

“That the EBRD would consider it justifiable to ask Ukraine to practically double electricity tariffs without any elaboration of impacts of such a sharp increase is a shocking finding,” comments Bankwatch’s coordinator for Ukraine Iryna Holovko. “Environmental groups consider this EBRD loan to be an inappropriate investment as it is a direct support for the nuclear energy sector. But now we see that even the economic viability of the project is dubious as some key financial assumptions appear to be far from reality – it is hard to imagine this doubling of tariffs would be as smooth as assumed in this document.”

The financial analysis that the EBRD relied upon to decide in favor of this loan is based on some shaky assumptions: 1) a sharp and significant tariff increase for Energoatom’s electricity (to 27,1 kopeks/kWh in 2012 and 42,6 kopeks/kWh in 2013), 2) maintaining the current level of electricity generation and 3) whooping revenues of Energoatom. By the time this document was completed (March 2013), it was already clear that the nuclear electricity tariff in Ukraine was not increasing according to the projections made by the EBRD (it was 22,8 kopeks/kWh) and that Energoatom was not as profitable as the EBRD thinks (Energoatom closed the year 2012 with 2,73 billion UAH loses instead of profits). The assumptions on the basis of which the EBRD relied to make the decision about this loan are simply flawed.

„It is highly unikely that the Ukrainian government would go ahead with such a tariff increase as assumed by the bank – the raising of electricity tariff is historicaly a very sensitive issue in Ukraine,” says Holovko. „Demand for nuclear electricity in the contry is decreasing lately and a number of nuclear units are now facing the end of their technical lifetime. Instead of investing millions of euro in upgrades to all units, it would make more sense to close down expired units and utilize the remaining ones with higher load factor allowing for decreased nuclear risks and less financial burden.”

„The EBRD should have done a much more thorough analysis of the project’s economics and the issue of electricity affordability and of how the tariff increase would be implemented in practice should have been discussed publicly in Ukraine before the EBRD made any decision,” says Fidanka Bacheva-McGrath, Bankwatch EBRD coordinator. „Instead, the EBRD chose to keep the documents secret.”

Ukrainian NGO NECU, which has recently published an analysis of EBRD investments in the Ukrainian energy sector, argues that it is a feature of this bank’s activity in the energy sector of Ukraine that it does not manage to ensure either economic or environmental sustainability of projects.

According to a NECU analysis, of the 1.2 billion euros invested by the EBRD in Ukraine between 2006 and 2013, over 60 percent were invested in unsustainable energy sources, such as nuclear, oil and gas. Even more, the biggest chunk of the EBRD’s financial support to the Ukrainian energy sector was allocated to nuclear energy and supporting infrastructure (such as transmission lines) that would ensure electricity exports to the European Union, in line with both the EU’s and Ukraine’s long-term plans of making Ukraine a provider for Europe.

“Ukraine’s problem with energy is not a lack of resources – the real problem is the shameless wasting of these resources,” comments Fidanka Bacheva-McGrath. “Six to seven times more energy is consumed per square meter of residential and office areas in Ukraine than in EU. Why doesn’t the EBRD focus its efforts in Ukraine on the development and effective implementation of state or regional energy efficiency programs?”

For more information, contact:

Iryna Holovko
iryna at bankwatch.org
+38 050 647 67 00

UPDATED: Slovenia continues to fall into the economic abyss of the lignite plant at Sostanj


UPDATE (January 24, 2014, 14:49): The text has been modified to include a reference to the EBRD’s assessment of Slovenia’s economic outlook.

Ljubljana – The scandal-marred lignite plant TES 6 at Sostanj in Slovenia will likely cost 1.44 billion euros (2 billion US), more than double than what was initially predicted, and is due to produce annual losses of 50 million euros, show calculations recently revealed by Slovenian media (1). These cost escalations, predicted by NGOs critical of the project, should constitute a word of caution for other countries in South-Eastern Europe that are considering building new coal capacities.*

* READ OUR BRIEFING ON UPCOMING COAL PROJECTS IN THE BALKANS:
https://bankwatch.org/sites/default/files/briefing-WesternBalkans-Coal-24Jan2014.pdf

Today, the Slovenian parliament is meeting in an extraordinary session to address the risk of cashing tax payer’s money for the losses of the corruption infected project. Last year, Slovenian authorities agreed to offer a state guarantee for a half a billion euro loan from the European Investment Bank that was crucial to turn the project into reality (2).

The Slovenian government too, debated the issue of cost overruns this month, considering even the option of dropping the coal project altogether. Slovenian Prime Minister Alenka Bratusek was quoted by the national press agency on 15 January: “We don’t have the privilege to decide whether this project can still be stopped. The data we have show halting it would be more expensive than completion.”

When Slovenian authorities agreed to offer a state guarantee for the EIB loan last year, they posed several conditions: that Termoelektrarna Šoštanj manages to keep costs for the plant at below €1,3 billion and that the price of the lignite stays at a level of 2,25 €/GJ (otherwise the project would not be economically viable and the state would have to cover losses – precisely what seems set to happen now). None of these conditions are being met and, with electricity prices very low, the project is looking increasingly like a liability. If the plant runs at such a big loss, the state guarantee may have to be cashed in – a worrying prospect for a country in recession with bleak growth potential, as the EBRD’s own assessment from January 21 notes: “At the same time, growth remains well below potential and Slovenia is expected to remain in recession […]”. (3)

Slovenian media reported this month that the EIB too has sent a letter to the project promoter (HSE, which owns Termoelektrarna Šoštanj) asking for clarifications on the economics of the project and indicating that they could withdraw funding.

“NGOs have been for years warning about the dodgy economics of this project, appealing both to the government and to the EIB not to get into it, but to no avail,” says Lidija Živčič from Focus Slovenia. “Now it looks like Slovenian tax payers’ money will have to cover the damage of this project, in spite of an appeal to our coalition government to step out of the project now, before more losses accumulate, which was signed by a coalition of 17 NGOs.” (4)

“The amount of bad decision-making on this project, from Slovenian authorities and international financial institutions supporting it (the EIB and the EBRD), is staggering,” comments Bankwatch’s Pippa Gallop. “Although known as the ‘Switzerland of the Balkans’, Slovenia made a disastrous decision in regard to this project. While for the EIB and the EBRD a loss making coal plant in Slovenia won’t make a big difference – especially since it is state guaranteed – for Slovenia it can mean the difference between floating and sinking.

“Sostanj must serve as a lesson to its neighbours in the Western Balkans which are planning new lignite-fired power plants under the false impression that it is cheap. Lignite is dirty at the best of times, but plants such as Pljevlja II in Montenegro, Kostolac B3 in Serbia or Stanari in Bosnia and Herzegovina are not even planned to run in accordance with EU standards, which will run up additional costs in a few years’ time when they have to be upgraded.”

Notes

(1) Read the Slovenian government’s statement in response to a brief about the state of the project (15.7.2013):

http://www.vlada.si/medijsko_sredisce/sporocila_za_javnost/sporocilo_za_javnost/article/vlada_sprejela_mnenje_glede_tes_6_40357/

Point 2 of the conclusions states: “…the project does not ensure implementation within the time and financial framework set when the decision about this investment was made” (it also says that available data is insufficient to understand the reasons for such cost increase of the investment)

(2) TES 6 is estimated to cost around 1.44 billion euros at the moment, and estimates are rising all the time. Of this sum, the EIB has covered 550 million euros via a loan approved last year, of which 440 million are guaranteed by the Slovenian state. The EBRD too is supporting the project with 200 million euros, half a loan from the institution itself and another half as syndicated commercial banks loan.

(3) http://www.ebrd.com/pages/news/press/2014/140121.shtml

(4) Link to the NGO letter:
http://www.focus.si/files/pismo_koalicijske_stranke_TES6.pdf