Environmental Lending in Central and Eastern Europe the Geographical Context

Environmental Lending in Central and Eastern Europe The Geographical Context

Member States

Acceding Countries, where negotiations for EU Membership have been concluded.

Accession Countries, where negotiations for joining the EU are in progress.

Candidate Countries, where an application for accession has been approved by a European Council Decision.

FINLAND

SWEDEN

Helsinki

Stockholm Tallinn ESTONIA

Riga LATVIA LITHUANIA DENMARK Copenhagen Vilnius

Dublin NETHER- LANDS UNITED- Berlin POLAND IRELAND Amsterdam KINGDOM Warsaw

London Brussel GERMANY BELGIUM Prague LUXEMBOURG CZECH REP.

Paris SLOVAKIA Vienna Bratislava AUSTRIA Budapest FRANCE HUNGARY SLOVENIA ROMANIA

Bucharest

Sofia Rome BULGARIA

PORTUGAL Madrid ITALY Ankara Lisbon SPAIN GREECE

Athens TURKEY

Valletta MALTA Nicosia

CYPRUS Introduction

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

The EIB provides financing for as specific environmental lending including the European Bank for projects that, in addition to fur- objectives, the environmental Reconstruction and Development thering economic development, acceptability of every project (EBRD) and the World Bank will assist those countries in meet- financed by the Bank is reviewed. Group, as well as commercial ing the requirements of the banks operating in the region. Acquis Communautaire and facili- The EIB is already the largest tate the enlargement process by provider of long-term funds to The EIB, typically in support of the reinforcement and support of countries wishing to join the municipalities, is also increasingly EU policy objectives. Projects European Union. The Bank often helping to strengthen other envi- financed by the EIB include those works in synergy with the Euro- ronmental sectors in the region, to protect and enhance the natu- pean Commission’s Grant Instru- including the provision of urban ral and urban environment as ment for Structural Policies for public transport, district heating well as providing basic environ- Pre-Accession (ISPA) to provide systems, renewable energy, mental services. long-term finance for transport energy efficiency and urban and environmental projects, the renewal. Some of this financing This Report is a supplement to the latter including projects in the activity promotes the Bank’s pol- first EIB Environmental Report water, wastewater and solid icy on climate change; to reduce 2001-2002, to reflect the unique waste sectors. The Bank also greenhouse gas emissions in a circumstances of current environ- works closely with other multi- cost effective manner. In the mental lending in the Acceding lateral financial institutions, wider context of sustainable and Accession Countries. It should be read in conjunction with other EIB publications, including the Budapest, Hungary Annual Report.

Due to differences in history and geography, environmental lending in Malta, Cyprus and Turkey is excluded from the Report.

Enlargement and the Environment

Protecting and enhancing the environment is today one of the EIB’s top lending priorities. As well

page 3 development, the Bank aims to More formally, investment must Directive and the Drinking Water encourage investment in less satisfy the overall objectives of Treatment Directive. Similarly, in favoured parts of the region that the EC Treaty (Article 174), in the field of solid waste manage- promotes economic growth con- particular to provide environment, implementation of the sistent with protection and mental services that comply with Waste Framework Directive, the enhancement of the environ- the requirements of the Acquis Landfill Directive and the Direc- ment. Communautaire. According to tive on the Incineration of Waste one early estimate, the costs of will also require considerable new Finally, in the industrial sector, the compliance could amount to an investment. Bank promotes the adoption of estimated investment of around new environmentally friendly EUR 80 to 120 billion for Central Other Directives requiring signifi- technologies encouraging the use and Eastern Europe. Whilst high, cant investment include the Large of clean, energy efficient this cost will result in significant Combustion Plant Directive and processes and appropriate envi- benefits to public health, the the Integrated Pollution Preven- ronmental management practices environment and consequently tion and Control (IPPC) Directive. as opposed to “end-of-pipe” solu- the economy. tions. Consideration is also being given Where substantial adaptation of to meeting the objectives of The Environmental Context infrastructure is necessary to meet the EU 6th Environment Action the requirements of the EU Direc- Programme (2001-2010). Finally, Environmental investment in the tives, investment may be phased environmental investment is Acceding and Accession Countries in accordance with transitional more generally being driven by of Central and Eastern Europe is arrangements. Significant invest- increasing public interest in envi- required in order to address the ment will be required in connec- ronmental issues, the liberalisa- environmental legacy of resource- tion with the Water Framework tion of markets (including cross- intensive industry that has had Directive and in particular the border trade) and foreign direct little regard to pollution control. Urban Wastewater Treatment investment. Investment is also required to reduce the inefficient use of Kaunas, LithuaniaConstanta Port, Romania energy and to provide access to basic environmental services, such as the provision of drinking water and the collection and treatment of wastewater and solid waste.

Investment must be carried out in such a way as to protect and enhance the region’s rich environmental heritage, including the maintenance of biodiversity through the protection of habitats. The EIB achieves this by supporting measures mitigating and/or compensating the environmental impact of each project and by investing in specific projects to protect and enhance habitats and the natural environment, for example, sustainable tourism financed through Global Loans. page 4 Lending Activity

Projects Lending in Central and • An increased availability in Eastern Europe, For the four-year period 1999- grants (in particular ISPA) to 1999-2002 2002, the EIB provided EUR 11.6 stimulate the preparation of billion in financing to countries in environmental investments EUR million Central and Eastern Europe, and to facilitate co-financing 5000 including EUR 1.7 billion through opportunities, associated with Global Loans. Of the financing the Bank’s advisory role to the 4000 provided directly by the Bank, Commission in this respect; 28% concerned environmental 3000 projects, with a gradual increase • Improvements in the institu- over time. This expansion in invest- tional and policy framework ment in environmental projects and enhanced borrower 2000 would appear to be the result of: capacity;

1000 • A growth in public and political • A deliberate increase in the awareness of environmental environmental lending activity 0 issues; on the part of the Bank. 1999 2000 2001 2002

• The investments required to make The distribution of environmental Individual Projects the transition towards member- lending by country tends to Environmental Projects ship of the European Union; reflect the national priority given Global Loans

Environmental Lending by Country, 1999-2002

EUR million 500 1999 2000 2001 2002 400

300

200

100

0 Bulgaria Czech Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Republic

page 5 Environmental Lending for Individual Projects, 2001-2002

EUR million

1200 The EIB project lending classification records pri- 1020 mary benefits of direct lending operations only. 1000 Neither the secondary environmental benefits of direct lending operations 800 nor the environmental benefits of indirect lending 592 through Global Loans, for 600 544 instance, in the areas of eco-efficiency, sustainable transport and carbon sequestration, are reflected 400 in the figures. 236 200 127 138.5

38 10 30 0

eco-efficiency energy saving urban transport urban renewal land/soil protection energy substitution solid/hazardous waste carbon sequestrationsustainable transport water and wasteair qualitywater improvement natural disaster alleviation natural resource management

to environmental investment as One of the most significant sec- well as demand brought about by tors for EIB financing is water, Case Study: Hungary chance events, such as severe including the provision of drink- flooding. In addition, large single ing water, wastewater treatment The EIB has agreed two envi- investments, for example, for and associated infrastructure. ronmental Sector Loans (2001 urban metro projects in Romania This reflects the investment and 2002, EUR 123 million in and the Czech Republic, can have required to meet the ambient total) in Hungary. Both loans a disproportionate effect on the and emissions standards of the complement ISPA grants to country distribution. Water Framework Directive. The Regional Municipal Waste and Water Associations for a series Waste water Treatment Plant, Debrecen, Hungary 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.

page 6 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 7 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 addition, 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 public transport in the city as an alternative to private vehicle use.

availability of grants is a major help to reduce the impact of flood- authorities implement small and factor in stimulating water ing in the future (see case study). medium sized projects in the investments. water, wastewater and waste Urban transport projects also management infrastructure sec- Natural disaster alleviation, includ- attracted large volumes of EIB tors. In the period 1999-2002, the ing flood protection and the financing during this period, Bank financed 15 such projects in reconstruction of damaged infra- though the main investments Central and Eastern Europe with structure, has, however, been the were limited to 3 large ongoing a total loan volume of EUR 568 largest area of investment projects, namely the modernisa- million, i.e. the Czech Republic (3 required during this period due tion of the Bucharest Metro, the projects totalling EUR 220 mil- to the serious floods in 2000 rehabilitation of Bucharest Urban lion), Estonia (EUR 12 million), (Romania), 2001 (Hungary, Transport and the Prague Metro Hungary (2 projects totalling EUR Poland) and 2002 (Czech Repu- (see case study). 123 million, see case study), Latvia blic). The EIB responded quickly to (EUR 20 million), Lithuania (EUR these events in order to contribute There has been an increasing 15 million), Poland (5 projects to the restoration of economic trend in so-called EIB environ- totalling EUR 113 million), Romania activities and environmental ser- mental Framework Loans that sup- (EUR 55 million) and Slovenia vices, and wherever possible, to port municipalities and regional (EUR 10 million). page 8 The Borrower ties in a sector exist, the Bank may conduct a sector analysis to Case Study: Foreign There has been a gradual shift in help inform project financing. Direct Investment, the type of borrower of EIB loans, The Bank also conducts evalua- Poland similar to that seen elsewhere in tion studies of its own financing Europe for Bank-financed activi- activities, which are available on In 2002, the EIB signed a EUR ties. This in itself has implications the EIB website, e.g. “EIB Financ- 30 million loan with Saturn for the environmental lending of ing of Energy Projects in the EU Energy (Poland), for the major the EIB. and in CEE countries”. refurbishment of a combined First, there has been a gradual Standards heat and power generation move away from lending to Cen- plant supplying steam and tral Government towards lending The EIB applies the same electricity to a pulp and paper directly to regional authorities approach and standards to envi- mill at Swiecie, Poland. The and municipalities. At the same ronmental assessment of projects investment is for the construc- time, loans are becoming more in Central and Eastern Europe as tion of a new fluidised bed diverse, such that an increasing in the EU Member States. During boiler, fed by a combination of number of loans have been project appraisal, the Bank consid- biomass and coal. agreed for multi-sector pro- ers the economic, technical, finan- grammes, including projects cial and environmental aspects of The project includes an over- where the objective is to encour- the project, including compliance haul of 3 existing coal-fired age regional development, regen- with EU policy and legislation and boilers and the upgrade of erate the urban environment national legislation. Any deroga- electricity generation equip- and/or provide basic (albeit tion must be consistent with ment. The project will improve mixed) environmental infrastruc- agreements reached between the environmental performance of ture. EU and the Acceding or Accession the plant through greater Country and be justified in cost energy efficiency and reduced Second, foreign direct investment benefit terms. emissions. (FDI) is increasing in the region. This is encouraged by the EIB, Saturn Energy is a which has also increased its capac- Special Purpose ity for working in this area, Company set up including public-private-partner- to supply energy ships (PPP). FDI is often an effec- to the paper mill. tive way to bring about a transfer The company is of knowledge, technology and 95% owned by the practices in the field of environment (see case study). Polish Enterprise Fund, which is The EIB often supports projects one of the largest that encourage sector reform, foreign investors usually in conjunction with other in Poland. financial institutions, such as the World Bank and the EBRD. The Bank is also co-operating with the Administrations of some of the countries and the European Com- mission to initiate actions to ren- der the institutional framework more efficient. Where uncertain-

page 9 Future Activity

There are a number of factors This will include a continuation of tions in greenhouse gases and that may have so far constrained environmental lending through energy efficiency measures, among EIB environmental lending in Cen- sector specific lending, providing others. At the same time, the Bank tral and Eastern Europe, including loan finance to regions and will continue to assess carefully the the following: municipalities for multi-sector environmental acceptability of lending, including regional and projects undertaken for other than • The environment is often not urban development, encouraging environmental reasons, being the among the highest priorities for foreign direct investment and majority of its lending. In this public expenditure. also broadening the range of regard, it will continue to cooper- environmental projects financed ate with the European Commission • Public sector promoters may be to include more projects targeted - Directorate General for the Envi- inexperienced at putting at improving air quality and pro- ronment. together bankable projects, i.e. tecting natural habitats. presenting projects that meet Such developments will be partly the economic, technical, finan- The EIB will also aim to promote facilitated by co-financing oppor- cial and environmental require- the carbon market through reduc- tunities with EC structural funds. ments of the Bank.

• The environmental service may not be affordable to the con- Co-financing with European Commission Grant sumer. Financing

As experience grows, the capacity to implement projects increases The EIB may provide loans for projects co-financed by European and co-financers gain confidence, Commission grant aid; for example, the ISPA grant instrument lending for environmental projects provides support to investments in transport and environmental is expected to increase. Though protection. the loans can sometimes find In 2000 and 2001, the European Commission approved 169 ISPA themselves in competition with projects (including 100 dedicated to the environment) with a total grants, generally growth in lending will also be facilitated by project cost of EUR 6.1 billion, of which ISPA grants financed grants from the European Com- EUR 3.9 billion. mission and donor countries in During 2000-2001, around 22% of the EIB lending in the Acceding reducing the overall costs of Countries was dedicated to projects co-financed by EU grants. In finance and for strengthening the context of the enlargement of the EU, Cohesion Funds will project preparation and imple- replace the ISPA programme. Grant aid in the 10 new Member mentation capacity. States will increase from EUR 1.14 billion per annum (under ISPA) The EIB expects its lending activity to EUR 2.8 billion. to increase in Central and Eastern Europe. In addition, the Bank also The EIB will continue to work closely with the European Commission envisages the percentage of its to achieve the best combination of grants and loans in the total lending dedicated to the expanded European Union. environmental sector to match the targets set for the existing EU.

page 10 The EIB expects to co-operate further with the Commission’s Direc- Case Study: Co-financing, Bulgaria torate General for Regional Policy and Directorate General for The rehabilitation of the Maritza East II power plant, Units 7 and Enlargement as advisor in project 8, and installation of flue gas desulphurisation (FGD) - part preparation and appraisal and as a lender in order to maximise the financed by the EIB - was completed in November 2002. The benefits of combining EIB loans project involved the engineering, construction, commissioning, full with Community grants. acceptance tests and continuous commercial operation of 2 units of an 840 MW lignite-fired power plant located near Stara Zagora The EIB will aim to work generally in south central Bulgaria. The project complies with the Bulgarian with others able to provide tech- law on emissions from large combustion plants. During commer- nical assistance grants to support cial operation, the degree of desulphurisation is not to be less than capacity building in project 90% and dust emissions are to be kept below 50mg/Nm3. preparation and implementation. The cost of the rehabilitation was EUR 104 million. The EIB pro- The EIB will seek to increase lend- vided EUR 45 million for the launch; the EBRD loaned EUR 40 ing through financial intermedi- million, while EUR 7.5 million was released under the Phare grant- aries, including loans targeted at financing program. environmental projects. EIB/EBRD involvement in the rehabilitation project was key to The EIB continues to develop its the implementation of the environmental measures. experience of working through river basin and regional seas programmes to facilitate investment in prioritised environmental projects.

Finally, the EIB recognises its role in improving environmental awareness, information disclosure and public participation in the Region, and seeks to collaborate with rep- resentatives of civil society in terms of general policy dialogue.

“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).

page 11 European Investment Bank

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For further information please consult the EIB’s web site: www.eib.org or contact:

Peter Carter Environment Unit Tel. (+352) 43 79-3424 Fax (+352) 43 79-3492 E-mail: [email protected]

Yvonne Berghorst Information and Communications Department Tel. (+352) 43 79-3154 Fax (+352) 43 79-3189 E-mail: [email protected]

Material which appears in this EIB publication may be freely reproduced; ISBN 92-861-0083-3 an acknowledgement and clipping of any article published would be appreciated. Lay-out: EIB Graphic Workshop. Photos: Barcs Endre, Eyewire Images, Isopress: Keystone Praha/Rex Features and Stanislav Zbynek/CTK/Getty Images, PhotoDisc, Sue Cunningham, Digitalvision.