Environmental Lending in Central and Eastern Europe

Athens

Paris

Valletta

London

Dublin

Madrid

Lisbon

Brussel

AmsterdamBerlin

Copenhagen

Stockholm

Helsinki

Tallinn

Riga

Vilnius

Warsaw

Prague

Bratislava

Budapest

Nicosia

Ankara

Sofia

Bucharest

Vienna

Rome

HUNGARY

CZECH REP.

AUSTRIA

SLOVAKIA

NETHER-LANDS

ESTONIA

FRANCE

UNITED-KINGDOM

IRELAND

GERMANY

FINLAND

LATVIA

LITHUANIA

CYPRUS

POLAND

ROMANIASLOVENIA

DENMARK

ITALY

MALTA

GREECESPAIN

BELGIUM

LUXEMBOURG

SWEDEN

PORTUGAL

BULGARIA

TURKEY

The Geographical Context

Member States

Acceding Countries, wherenegotiations for EU Membershiphave been concluded.

Accession Countries, wherenegotiations for joining the EUare in progress.

Candidate Countries, wherean application for accession hasbeen approved by a EuropeanCouncil Decision.

page 3

Introduction

The EIB provides financing forprojects that, in addition to fur-thering economic development,will assist those countries in meet-ing the requirements of theAcquis Communautaire and facili-tate the enlargement process bythe reinforcement and support ofEU policy objectives. Projectsfinanced by the EIB include thoseto protect and enhance the natu-ral and urban environment aswell as providing basic environ-mental services.

This Report is a supplement to thefirst EIB Environmental Report2001-2002, to reflect the uniquecircumstances of current environ-mental lending in the Accedingand Accession Countries. It shouldbe read in conjunction with otherEIB publications, including theAnnual Report.

Due to differences in history andgeography, environmental lend-ing in Malta, Cyprus and Turkey isexcluded from the Report.

Enlargement and the Environment

Protecting and enhancing theenvironment is today one of theEIB’s top lending priorities. As well

as specific environmental lendingobjectives, the environmentalacceptability of every projectfinanced by the Bank is reviewed.

The EIB is already the largestprovider of long-term funds tocountries wishing to join theEuropean Union. The Bank oftenworks in synergy with the Euro-pean Commission’s Grant Instru-ment for Structural Policies forPre-Accession (ISPA) to providelong-term finance for transportand environmental projects, thelatter including projects in thewater, wastewater and solidwaste sectors. The Bank alsoworks closely with other multi-lateral financial institutions,

including the European Bank forReconstruction and Development(EBRD) and the World BankGroup, as well as commercialbanks operating in the region.

The EIB, typically in support ofmunicipalities, is also increasinglyhelping to strengthen other envi-ronmental sectors in the region,including the provision of urbanpublic transport, district heatingsystems, renewable energy,energy efficiency and urbanrenewal. Some of this financingactivity promotes the Bank’s pol-icy on climate change; to reducegreenhouse gas emissions in acost effective manner. In thewider context of sustainable

The integration of the Acceding and Accession Countriesfrom Central and Eastern Europe into the European Union(EU) is one of the key challenges and opportunities for theEIB over the coming years.

Budapest, Hungary

page 4

development, the Bank aims toencourage investment in lessfavoured parts of the region thatpromotes economic growth con-sistent with protection andenhancement of the environ-ment.

Finally, in the industrial sector, theBank promotes the adoption ofnew environmentally friendlytechnologies encouraging the useof clean, energy efficientprocesses and appropriate envi-ronmental management practicesas opposed to “end-of-pipe” solu-tions.

The Environmental Context

Environmental investment in theAcceding and Accession Countriesof Central and Eastern Europe isrequired in order to address theenvironmental legacy of resource-intensive industry that has hadlittle regard to pollution control.Investment is also required toreduce the inefficient use ofenergy and to provide access tobasic environmental services, suchas the provision of drinking waterand the collection and treatmentof wastewater and solid waste.

Investment must be carried out insuch a way as to protect andenhance the region’s rich environ-mental heritage, including themaintenance of biodiversitythrough the protection of habitats.The EIB achieves this by support-ing measures mitigating and/orcompensating the environmentalimpact of each project and byinvesting in specific projects to pro-tect and enhance habitats andthe natural environment, forexample, sustainable tourismfinanced through Global Loans.

More formally, investment mustsatisfy the overall objectives ofthe EC Treaty (Article 174), inparticular to provide environ-mental services that comply withthe requirements of the AcquisCommunautaire. According toone early estimate, the costs ofcompliance could amount to anestimated investment of aroundEUR 80 to 120 billion for Centraland Eastern Europe. Whilst high,this cost will result in significantbenefits to public health, theenvironment and consequentlythe economy.

Where substantial adaptation ofinfrastructure is necessary to meetthe requirements of the EU Direc-tives, investment may be phasedin accordance with transitionalarrangements. Significant invest-ment will be required in connec-tion with the Water FrameworkDirective and in particular theUrban Wastewater Treatment

Directive and the Drinking WaterTreatment Directive. Similarly, inthe field of solid waste manage-ment, implementation of theWaste Framework Directive, theLandfill Directive and the Direc-tive on the Incineration of Wastewill also require considerable newinvestment.

Other Directives requiring signifi-cant investment include the LargeCombustion Plant Directive andthe Integrated Pollution Preven-tion and Control (IPPC) Directive.

Consideration is also being givento meeting the objectives ofthe EU 6th Environment ActionProgramme (2001-2010). Finally,environmental investment ismore generally being driven byincreasing public interest in envi-ronmental issues, the liberalisa-tion of markets (including cross-border trade) and foreign directinvestment.

Kaunas, Lithuania Constanta Port, Romania

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Lending in Central andEastern Europe, 1999-2002

Lending Activity

Projects

For the four-year period 1999-2002, the EIB provided EUR 11.6billion in financing to countries inCentral and Eastern Europe,including EUR 1.7 billion throughGlobal Loans. Of the financingprovided directly by the Bank,28% concerned environmentalprojects, with a gradual increaseover time. This expansion in invest-ment in environmental projectswould appear to be the result of:

• A growth in public and politicalawareness of environmentalissues;

• The investments required to makethe transition towards member-ship of the European Union;

• An increased availability ingrants (in particular ISPA) tostimulate the preparation ofenvironmental investmentsand to facilitate co-financingopportunities, associated withthe Bank’s advisory role to theCommission in this respect;

• Improvements in the institu-tional and policy frameworkand enhanced borrowercapacity;

• A deliberate increase in theenvironmental lending activityon the part of the Bank.

The distribution of environmentallending by country tends toreflect the national priority given

0

1000

2000

3000

4000

5000

2002200120001999

0

100

200

300

400

5001999200020012002

Environmental Lending by Country, 1999-2002

Bulgaria Czech Republic

Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia

EUR million

EUR million

Individual Projects

Environmental Projects

Global Loans

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to environmental investment aswell as demand brought about bychance events, such as severeflooding. In addition, large singleinvestments, for example, forurban metro projects in Romaniaand the Czech Republic, can havea disproportionate effect on thecountry distribution.

One of the most significant sec-tors for EIB financing is water,including the provision of drink-ing water, wastewater treatmentand associated infrastructure.This reflects the investmentrequired to meet the ambientand emissions standards of theWater Framework Directive. The

Environmental Lending for Individual Projects, 2001-2002

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127

544

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592

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600

800

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1200

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Case Study: Hungary

The EIB has agreed two envi-

ronmental Sector Loans (2001

and 2002, EUR 123 million in

total) in Hungary. Both loans

complement ISPA grants to

Regional Municipal Waste and

Water Associations for a series

of schemes to support a

national programme for

investment in water supply,

wastewater treatment and

solid waste management.

The projects are necessary to

improve the supply of critical

environmental services, to

standards required by EU

Directives.

Waste water Treatment Plant, Debrecen, Hungary

EUR million

The EIB project lendingclassification records pri-mary benefits of directlending operations only.Neither the secondary envi-ronmental benefits ofdirect lending operationsnor the environmentalbenefits of indirect lendingthrough Global Loans, forinstance, in the areas ofeco-efficiency, sustainabletransport and carbonsequestration, are reflectedin the figures.

page 7

Case Study: Flood Protection and Damage Reconstruction

The EIB has signed loans with the authorities in the Czech Republic, Hungary, Poland and Romania for

emergency programmes for the reconstruction of basic infrastructure following severe flooding, as well as

investment programmes to mitigate flood risk and landslides in the future.

Following floods in Romania in April 2000, a EUR 250 million framework loan was agreed to part finance

urgent repair work, in particular to damaged infrastructure and services and for flood protection measures.

Flooding in Hungary in March 2001 led to a similar emergency programme for the reconstruction of basic

infrastructure. A EUR 60 million loan was agreed in 2001 to assist in the restoration of economic and

social activity, with investments also including reconstruction of nature reserves and replanting, repair of

public buildings, including government offices and churches, and the repair of residential property.

Similar programmes were established for Poland in 2001 (EUR 250 million) concentrating on repairing and

expanding flood management provisions, and the Czech Republic in 2002 whereby EUR 60 million was allo-

cated to flood prevention and EUR 400 million to damage reconstruction.

In terms of disaster prevention, in 2003 the EIB will support a landslide protection framework loan,

co-financed with the Polish Government, to protect vital infrastructure against landslide risk. Projects may

range from landslide stabilisation and infrastructure relocation to landslide risk mapping and warning systems.

page 8

authorities implement small andmedium sized projects in thewater, wastewater and wastemanagement infrastructure sec-tors. In the period 1999-2002, theBank financed 15 such projects inCentral and Eastern Europe witha total loan volume of EUR 568million, i.e. the Czech Republic (3projects totalling EUR 220 mil-lion), Estonia (EUR 12 million),Hungary (2 projects totalling EUR123 million, see case study), Latvia(EUR 20 million), Lithuania (EUR15 million), Poland (5 projectstotalling EUR 113 million), Romania(EUR 55 million) and Slovenia(EUR 10 million).

Case Study: Prague Metro

The city of Prague has suffered from escalating car

ownership, equivalent to over 500 private cars per

1000 inhabitants; this is one of the highest levels

of vehicle ownership for a city in Europe. In addi-

tion, in Prague a declining percentage of passen-

gers use public transport, recently stabilising at

approximately 60%. This stabilisation has been

due to both the improvements in the metro system

and the increasing congestion at street level.

The EIB has financed a number of projects relat-

ing to the extension and upgrading of the metro,

including new lines, tunnels, power generation

units, rolling stock and the construction of

stations.

The project should help to encourage the use of pub-

lic transport in the city as an alternative to private

vehicle use.

availability of grants is a majorfactor in stimulating waterinvestments.

Natural disaster alleviation, includ-ing flood protection and thereconstruction of damaged infra-structure, has, however, been thelargest area of investmentrequired during this period dueto the serious floods in 2000(Romania), 2001 (Hungary,Poland) and 2002 (Czech Repu-blic). The EIB responded quickly tothese events in order to contributeto the restoration of economicactivities and environmental ser-vices, and wherever possible, to

help to reduce the impact of flood-ing in the future (see case study).

Urban transport projects alsoattracted large volumes of EIBfinancing during this period,though the main investmentswere limited to 3 large ongoingprojects, namely the modernisa-tion of the Bucharest Metro, therehabilitation of Bucharest UrbanTransport and the Prague Metro(see case study).

There has been an increasingtrend in so-called EIB environ-mental Framework Loans that sup-port municipalities and regional

page 9

The Borrower

There has been a gradual shift inthe type of borrower of EIB loans,similar to that seen elsewhere inEurope for Bank-financed activi-ties. This in itself has implicationsfor the environmental lending ofthe EIB.

First, there has been a gradualmove away from lending to Cen-tral Government towards lendingdirectly to regional authoritiesand municipalities. At the sametime, loans are becoming morediverse, such that an increasingnumber of loans have beenagreed for multi-sector pro-grammes, including projectswhere the objective is to encour-age regional development, regen-erate the urban environmentand/or provide basic (albeitmixed) environmental infrastruc-ture.

Second, foreign direct investment(FDI) is increasing in the region.This is encouraged by the EIB,which has also increased its capac-ity for working in this area,including public-private-partner-ships (PPP). FDI is often an effec-tive way to bring about a transferof knowledge, technology andpractices in the field of environ-ment (see case study).

The EIB often supports projectsthat encourage sector reform,usually in conjunction with otherfinancial institutions, such as theWorld Bank and the EBRD. TheBank is also co-operating with theAdministrations of some of thecountries and the European Com-mission to initiate actions to ren-der the institutional frameworkmore efficient. Where uncertain-

ties in a sector exist, the Bankmay conduct a sector analysis tohelp inform project financing.The Bank also conducts evalua-tion studies of its own financingactivities, which are available onthe EIB website, e.g. “EIB Financ-ing of Energy Projects in the EUand in CEE countries”.

Standards

The EIB applies the sameapproach and standards to envi-ronmental assessment of projectsin Central and Eastern Europe asin the EU Member States. Duringproject appraisal, the Bank consid-ers the economic, technical, finan-cial and environmental aspects ofthe project, including compliancewith EU policy and legislation andnational legislation. Any deroga-tion must be consistent withagreements reached between theEU and the Acceding or AccessionCountry and be justified in costbenefit terms.

Case Study: ForeignDirect Investment,Poland

In 2002, the EIB signed a EUR

30 million loan with Saturn

Energy (Poland), for the major

refurbishment of a combined

heat and power generation

plant supplying steam and

electricity to a pulp and paper

mill at Swiecie, Poland. The

investment is for the construc-

tion of a new fluidised bed

boiler, fed by a combination of

biomass and coal.

The project includes an over-

haul of 3 existing coal-fired

boilers and the upgrade of

electricity generation equip-

ment. The project will improve

environmental performance of

the plant through greater

energy efficiency and reduced

emissions.

Saturn Energy is a

Special Purpose

Company set up

to supply energy

to the paper mill.

The company is

95% owned by the

Polish Enterprise

Fund, which is

one of the largest

foreign investors

in Poland.

page 10

Future Activity

There are a number of factorsthat may have so far constrainedEIB environmental lending in Cen-tral and Eastern Europe, includingthe following:

• The environment is often notamong the highest priorities forpublic expenditure.

• Public sector promoters may beinexperienced at puttingtogether bankable projects, i.e.presenting projects that meetthe economic, technical, finan-cial and environmental require-ments of the Bank.

• The environmental service maynot be affordable to the con-sumer.

As experience grows, the capacityto implement projects increasesand co-financers gain confidence,lending for environmental projectsis expected to increase. Thoughthe loans can sometimes findthemselves in competition withgrants, generally growth in lend-ing will also be facilitated bygrants from the European Com-mission and donor countries inreducing the overall costs offinance and for strengtheningproject preparation and imple-mentation capacity.

The EIB expects its lending activityto increase in Central and EasternEurope. In addition, the Bank alsoenvisages the percentage of itstotal lending dedicated to theenvironmental sector to match thetargets set for the existing EU.

This will include a continuation ofenvironmental lending throughsector specific lending, providingloan finance to regions andmunicipalities for multi-sectorlending, including regional andurban development, encouragingforeign direct investment andalso broadening the range ofenvironmental projects financedto include more projects targetedat improving air quality and pro-tecting natural habitats.

The EIB will also aim to promotethe carbon market through reduc-

tions in greenhouse gases andenergy efficiency measures, amongothers. At the same time, the Bankwill continue to assess carefully theenvironmental acceptability ofprojects undertaken for other thanenvironmental reasons, being themajority of its lending. In thisregard, it will continue to cooper-ate with the European Commission- Directorate General for the Envi-ronment.

Such developments will be partlyfacilitated by co-financing oppor-tunities with EC structural funds.

Co-financing with European Commission GrantFinancing

The EIB may provide loans for projects co-financed by European

Commission grant aid; for example, the ISPA grant instrument

provides support to investments in transport and environmental

protection.

In 2000 and 2001, the European Commission approved 169 ISPA

projects (including 100 dedicated to the environment) with a total

project cost of EUR 6.1 billion, of which ISPA grants financed

EUR 3.9 billion.

During 2000-2001, around 22% of the EIB lending in the Acceding

Countries was dedicated to projects co-financed by EU grants. In

the context of the enlargement of the EU, Cohesion Funds will

replace the ISPA programme. Grant aid in the 10 new Member

States will increase from EUR 1.14 billion per annum (under ISPA)

to EUR 2.8 billion.

The EIB will continue to work closely with the European Commission

to achieve the best combination of grants and loans in the

expanded European Union.

page 11

The EIB expects to co-operate fur-ther with the Commission’s Direc-torate General for Regional Policyand Directorate General forEnlargement as advisor in projectpreparation and appraisal and asa lender in order to maximise thebenefits of combining EIB loanswith Community grants.

The EIB will aim to work generallywith others able to provide tech-nical assistance grants to supportcapacity building in projectpreparation and implementation.

The EIB will seek to increase lend-ing through financial intermedi-aries, including loans targeted atenvironmental projects.

The EIB continues to develop itsexperience of working throughriver basin and regional seas pro-grammes to facilitate investment inprioritised environmental projects.

Finally, the EIB recognises its role inimproving environmental aware-ness, information disclosure andpublic participation in the Region,and seeks to collaborate with rep-resentatives of civil society in termsof general policy dialogue.

Case Study: Co-financing, Bulgaria

The rehabilitation of the Maritza East II power plant, Units 7 and

8, and installation of flue gas desulphurisation (FGD) - part

financed by the EIB - was completed in November 2002. The

project involved the engineering, construction, commissioning, full

acceptance tests and continuous commercial operation of 2 units

of an 840 MW lignite-fired power plant located near Stara Zagora

in south central Bulgaria. The project complies with the Bulgarian

law on emissions from large combustion plants. During commer-

cial operation, the degree of desulphurisation is not to be less than

90% and dust emissions are to be kept below 50mg/Nm3.

The cost of the rehabilitation was EUR 104 million. The EIB pro-

vided EUR 45 million for the launch; the EBRD loaned EUR 40

million, while EUR 7.5 million was released under the Phare grant-

financing program.

EIB/EBRD involvement in the rehabilitation project was key to

the implementation of the environmental measures.

“Environment for Europe”

The EIB has been a member of the “Environment for Europe” process since its inception at Dobris Castle

in 1991. The Bank subscribes to its main objectives, of harmonizing environmental quality and policies on

the continent of Europe.

The EIB is committed to regional cooperation in the field of environmental protection, supporting a

number of initiatives through technical support and lending activity. This includes the DABLAS Task

Force (addressing pollution hotspots in the River Danube and Black Sea catchment areas) and Baltic 21

(addressing pollution hotspots in the Baltic Sea catchment area).

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