Memorandum by the European Bank for Reconstruction
and Development
This Memorandum describes the components of
EU TACIS' contribution to EBRD's environmental work to illustrate
the nature and extent of EU TACIS collaboration with the EBRD,
an International Financial Institution specifically charged with
assisting the countries of the former Soviet Union in their transition
to market economies. Comments are also made concerning some wider
issues related to the present environmental situation in the TACIS
countries of operation and possible future collaboration and funding.
This Memorandum does not attempt to provide a complete overall
review of the Bank's environmental activities financed by EU TACIS.
EBRD was established in 1991 to assist the countries
of central and eastern Europe and of the former Soviet Union in
their transition to market economies, primarily through loans,
equity investments and other commercial financing mechanisms.
The Bank shareholders include its countries of operation, all
OECD countries, the European Community, and the European Investment
Bank.
The Bank's Charter requires the institution
to "promote in the full range of its activities, environmentally
sound and sustainable development".
1. EU TACIS CONTRIBUTIONS
TO EBRD'S
ENVIRONMENTAL ACTIVITIES
The EU, through the TACIS programme, has provided
EBRD with grant funds and has contributed to EBRD's environmental
work through financing technical co-operation activities to assist
in the preparation and implementation of EBRD investments. This
is needed in order to enable the countries of the former Soviet
Union (excluding the Baltic States, which are incorporated in
the Phare programme) to utilise effectively the investment capital
that EBRD is able to offer them. Without technical co-operation
(TC) of this sort, many investments would either suffer delays
or would not take place at all. The TC funds in the environmental
sector are used to assist with the preparation and implementation
of specific Bank investments, with policy related studies and
for training programmes.
By assisting the EBRD countries of operation
to meet basic legal and regulatory requirements for investments
and by helping their institutions with investment analysis, as
well as technical, economic, financial and environmental due diligence,
EU TACIS funds allow a greater up-take of investment by these
countries than would otherwise be possible.
Project Preparation
The Bank has Framework Contracts with consulting
companies (so far for a total amount of approximately ECU 1 million),
financed through EU TACIS funds, to provide project preparation
support in the municipal and environmental sector. A wide scale
of TC activities can be provided, which is essential support to
the Bank's clients in developing a solid pipeline of bankable
projects in the municipal and environmental sector. These contracts
have proved very efficient in securing timely provision of short
term expert assistance requested often at short notice to Bank's
clients and support environmental infrastructure project preparation
activities in the TACIS countries of operation. The average assignment
value of such consultancy services amounts to approximately ECU
35,000. The wide range of specialised tasks incorporated for project
preparation are: pre-feasibility and feasibility studies (e.g.,
for Belarus Water and Environment Programme; Moldova Chisinau
Water and Waste Water Project); technical reviews of project proposals
as well as financial and legal due diligence (e.g., Russia, St
Petersburg Vodokanal Water Development Programme); review of the
regulatory and legal framework for, amongst others, the provision
of private sector services—corporatisation of utilities,
private sector involvement in the provision of urban services
(Ukraine Municipal Utilities Development Programme); institutional
restructuring (Uzbekistan Tashkent Solid Waste Management Rehabilitation/institutional
appraisal); procurement support; environmental management (Russia
Moscow Solid Waste Management); audits (Azerbaijan Baku Water
Supply) and advice on financing arrangements and municipal asset
management etc.
The majority of the projects receiving EU TACIS
TC support for preparation have assisted municipal authorities
and incorporated water supply, sewerage and waste water treatment,
sanitation, solid waste management and district heating. Also,
projects were prepared assisting industrial clients in the areas
of waste water treatment, pollution control and hazardous waste
management. These TC activities are of critical importance to
the Bank's continued efforts to fulfil its mandate in respect
to the municipal and environment sector. Multi-project facilities
have been developed as an instrument by the Bank to finance private
investment in municipal services, including projects in the water,
district heating, waste and recycling sectors. Furthermore, it
is envisaged that in future more emphasis will be given to the
development of creditworthiness of municipalities. An example
is the assistance given to the municipality of St Petersburg in
this respect, aiming at the development of new investments, e.g.,
water sector, drinking bottling plant and real estate development
in the central water treatment plant site. The St Petersburg Municipal
Services project also received a larger TC support from TACIS
(ECU 355,000) to prepare the investment, financed separately from
the Framework Contracts.
Project Implementation
As explained in the introduction, the Bank's
Environmental Policy requires the institution to "promote
in the full range of its activities, environmentally sound and
sustainable development". The Bank's environmental concerns
thus do not lie solely with its direct investment and lending
but also extend to the investment and lending activities of the
Bank's Financial Intermediaries (FIs).
To address these environmental concerns the
Bank requires that its FIs develop and implement environmental
procedures. General guidelines have been prepared for different
types of FIs to follow. In order to assist FIs in adapting the
Bank's environmental guidelines to local conditions and implement
these procedures.
Framework Contracts have been issued (total
amount of approximately ECU 1.6 million) under which consultants
with environmental/financial expertise will provide assistance
to the Bank's FIs—e.g., local and regional banks, investment
funds and banks participating in apex lending structures, mutual
and pension funds, leasing and insurance companies—to assess
the current operational procedures of the client FI, produce tailored
environmental procedures with supporting tools and train the FI
staff in their use. By using such procedures, FIs will be able
to avoid potential environmental risks and liabilities, avoid
lending to or investing in potentially hazardous or environmentally
damaging industries, and support sustainable development through
their operations. The average assignment is approximately ECU
38,000. The environmental procedures developed need to be effective
and tailor made to the needs of the FI and reflecting the existing
regulatory regime. Key staff of the FI is involved at all stages
of the individual assignments and a broad range of staff is trained,
including, where possible, the training units of the FI.
EU TACIS contribution has proved extremely beneficial
for the Bank in facilitating its environmental objectives with
regard to intermediated financing. It should be noted that all
the assignments are linked to FIs for which the Board has approved
an EBRD loan/investment. The programme of environmental due diligence
Framework Contracts to assist FIs has positive impact on the TACIS
countries of operation since FIs have been able to reject or restructure
environmentally harmful projects and to require that borrowers
comply with local environmental standards and regulations, reinforcing
the work of the environmental agencies. The environmental training
has resulted in better quality environmental reports and investment
proposals to EBRD.
Some EBRD's investment operations need a substantial
TC support for both preparation and implementation which cannot
be accommodated under the Framework Contracts, which are foreseen
for small short term assignments. Examples of substantial TC operations
to which EU TACIS contributed in preparation and implementation
support of Bank's investments are the Moldova Chisinau Water Services
Project (ECU 1 million) and the Ukraine Zaporozhzhia Water Utility
Development and Investment Project (ECU 1 million) for Corporate
Development and Institutional Development Assistance.
The TC's support includes, inter alia,
training, managerial support for improvements in financial, operational
and technical management, implementation support of the priority
investment programme, with the objective that through a Corporate
Development Partner the respective utilities are assisted in meeting
their objectives and discharging their functions in a newly evolving
commercial environment. It is unlikely that the investments in
physical infrastructure would yield the improvements in services,
energy savings and financial position required for a successful
outcome of these investment operations without the EU TACIS support.
Policy related studies and Training
Several TC operations have been financed with
EU TACIS funds which have either a policy aspect or concern general
guidebook developments and training programmes. As examples we
can mention the Investors Guidebook for Environment, Health and
Safety for the CIS and the Transport and Environmental Training
workshops (total amount approximately ECU 600,000).
Future Technical Co-operation with EU TACIS
The need for technical assistance in the TACIS
partner countries is increasing substantially. Among other things,
this is due to the increasing emphasis placed on investing in
projects in early and intermediate stage transition countries.
The result is a greater burden on EBRD and the recipient to ensure
due diligence, including the necessary environmental due diligence,
and a need to provide for implementation support and institution
building in an environment a priori less conducive to spontaneous
private sector development. The environmental and municipal infrastructure
will shift more towards the TACIS countries, where deficiencies
of public infrastructure are particularly acute.
EBRD will target infrastructure, including
municipal and environmental infrastructure, that is critical
for private sector development. Municipal infrastructure products
remain in demand and offer a particularly important opportunity
for growth. In infrastructure it is expected to see to move towards
more complex areas of state sector commercialisation and restructuring
and towards privatisation. An important part of EBRD's mandate,
and transition impact, is improvement in the environment and in
the use of energy resources.
CONCLUSION
The TC funds from TACIS contribute to the overall
objective of economic transformation and development in the New
Independent States. The main specific objective of the TC funds
is to increase the quantity and quality of EBRD investments through
the financing of technical co-operation projects that are crucial
for better preparation and implementation of EBRD investment projects
in a particularly difficult and uncertain business environment.
The TACIS TC funds have actually brought forth
and is continuing to bring forth a large amount of investment
financing, both from EBRD and from other sources. If TACIS wants
to use its technical assistance as a catalyst for investment projects,
the EBRD is an efficient instrument to this end.
2. SOME WIDER
ISSUES
The Committee has requested the EBRD's views
on some wider issues related to the NIS environmental sector and
the TACIS programme.
The region which is covered by the TACIS programme
has diverse geographical conditions, population densities, degrees
of industrialisation and urbanisation, and agricultural practices.
Accordingly, the environmental situation in the region is not
uniform. The following refers, in the main, to the Russian Federation
and Ukraine.
The Russian Federation has a costly environmental
legacy, the result of decades of inefficient economic development
that failed to include environmental considerations in macroeconomic
and sector development strategies and national investment plans.
In addition, environmental stress is evident across the economy
as the country searches for new sources of growth and comparative
advantage, as seen in natural resource sectors such as forestry.
Given this background, the most immediate environmental concern
of the country is the threat to public health.
Health statistics suggest that environmental
factors contribute adversely to public health problems. Serious
localised problems in "hot spots" have been documented
in urban areas such as Murmansk and Nizny Novgorod where there
are high levels of emissions from industry and coal-fired power
plants as well as from coal-powered heating systems and individual
heating systems. Another priority is the quality of drinking water
particularly for the rural population. This is affected by elevated
nitrate levels caused by pollution of village wells by sewage
and by effluents from agro-industries. Other concerns include
deterioration of, and in places threats of irreversible damage
to ecosystems, biological resources and landscapes, and productivity
losses caused by degradation of natural capital.
In Ukraine, air, water and soil pollution due
to heavy industry and coal mining in the central and eastern areas,
increasing water pollution in the Dnieper river due to urban and
industrial activities, and issues of nuclear safety and clean
up following the Chernobyl disaster are priority issues.
How should countries address these environmental
problems and how should a donor programme such as TACIS contribute?
The phasing out of subsidies in the energy, water and natural
resources sectors, the establishment of environmental funds, particularly
in the early transition countries, to channel money, collected
as environmental fees and fines, to environmental investments,
and the use of financial incentives and penalties to achieve energy
and other resource efficiency, waste reduction, and the use of
clean technologies. Within this framework, the private sector
has a crucial role to play in disseminating best practice. Donors
and International Financial Institutions can play a limited but
catalytic role.
For example, the Project Preparation Committee
(PPC), whose Secretariat is located at the EBRD, helps match multilateral
and bilateral donor financing for environmental projects with
the financing available from the EBRD and other International
Financial Institutions. This increases the affordability of environmentally
beneficial projects and catalyses more resources for environmental
investment.
To date the TACIS programme has principally
been used to provide technical assistance on public sector operations.
Opening up the TACIS programme to support, on a selective basis,
private sector operations to achieve environmental objectives
could strengthen the catalytic role of TACIS.
Ullrich Kiermayr
Director
Official Co-financing and Consultants Department
5 May 1998
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