Select Committee on European Communities Minutes of Evidence

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".


  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.


  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.


  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


Official Co-financing and Consultants Department

5 May 1998

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