The European Bank for Reconstruction and Development (EBRD) is the first multilateral development bank to have an explicit environmental mandate in its charter. The charter states that the Bank is to "promote in the full range of its activities environmentally sound and sustainable development." It also proclaims commitments to democracy and democratic institutions, rule of law, respect for human rights, and market economies. Nevertheless, some of the Bank's harshest critics have been environmentalists. They contend that the EBRD is not living up to these promises and in some respects is even less progressive in its environmental policies and procedures than other international lending institutions

This report supports these claims. It finds that the EBRD has no overarching environmental policy or criteria to guide its project lending. As a consequence, the EBRD has financed projects that are inconsistent with its mandate to promote sustainable development. The report examines several of these projects: a heavily polluting and energy intensive aluminum smelter; a proposed nuclear power plant project that has drawn intense international criticism from governments and environmentalists; and two oil field development projects that contributed to the tragic oil spill in the Komi region of Russia.

The report finds that the EBRD has inadequate procedures for conducting environmental due diligence environmental impact assessment, environmental audits, environmental remediation, and monitoring. Not only does the Bank need to improve its environmental procedures, but it must adhere to them more rigorously. Too often the Bank cuts corners in implementing its procedures, or fails to implement them altogether.

The EBRD's policy and procedures for public participation and information disclosure are especially weak. With its environmental mandate and commitment to democracy, the EBRD should be at the forefront among international financial institutions in promoting openness and participation. This report demonstrates, however, that the World Bank, the InterAmerican Development Bank, the Asian Development Bank, and the International Finance Corporation all have more open and participatory policies than the EBRD.

The report examines the functions of the Bank's Environmental Advisory Council (ENVAC)--a group of twelve experts that meets twice a year to advise the Bank on environmental matters and suggests ways the EBRD could make better use of the Council's expertise. It recommends an expanded role for the ENVAC, particularly in developing the Bank's environmental policies and procedures, which should not be adopted without ENVAC approval.

The report also demonstrates the need for an over-sight body to review the Bank's activities and slow down or stop a project if it finds that the Bank's policies and procedures are not being followed. The report proposes that the EBRD create an Independent Inspection Panel along the lines of the World Bank Inspection Panel.

There have been some recent, positive developments at the EBRD, including the creation of an Energy Efficiency Unit and an Environmental Infrastructure Department. These new departments could have a profound impact on future lending if they are fully integrated into Bank operations. While it is too soon to evaluate their performance, they already have initiated some commendable projects.

The report makes a number of recommendations for improving the Bank's energy, transportation, and agriculture operations policies. The energy policy sets out some clear markers for sound development of the conventional energy sector, but the brief section on nuclear energy should be developed into a separate, formalized policy. The transportation and agriculture policies are almost entirely lacking in environmental considerations and need to be completely rethought.

The aim of this report is to identify ways to improve the process of delivering development aid to Central and Eastern Europe and to help ensure that the Bank fulfils its mandate to promote sustainable development. The report makes a number of specific recommendations, which can be distilled into the following five statements:

1. The EBRD needs to formulate a sustainable development policy, criteria, and standards to guide project selection;

    

2. The EBRD needs to strengthen and enforce its environmental procedures, particularly those for public participation;

    

3. The EBRD needs to fully integrate environmental concerns into its decision- making process;

4. The EBRD needs to increase the number of initiatives aimed directly at improving the region's environment; and

5. The EBRD needs to create an independent oversight body to help ensure that its policies and procedures are followed diligently, and to provide the public with a grievance procedure when they are not.

The EBRD Environmental Mandate

To fulfil its environmental mandate, the EBRD must have a strategy to guide its project selection. It needs a sustainable development policy, criteria, and standards to ensure that projects are chosen not merely for reasons of economic or political expediency but because they will put the region on the path to environmentally sound and sustainable development.

The Need for a Sustainable Development Policy

The Bank's failure to integrate long-term environmental goals into its operations policies undermines all other Bank efforts to promote sustainable development in Central and Eastern Europe. Without such planning, regional viability and long-term environmental integrity are in jeopardy.

EBRD financing in Slovakia demonstrates the need for sustainable development planning. By proceeding in a piece-meal, project-driven fashion, the Bank finds itself supporting Slovakia's nuclear-powered, heavy industry strategy. Desirable alternatives remain unexplored due to the Bank's lack of long-range regional planning and sectoral integration.

The devastating oil spill in the Komi region of Russia provides especially compelling evidence of the need for a sustainable development policy. In the summer of 1994, an estimated 270,000 tons of crude oil spilled from the Kharyaga-Usinsk pipeline onto the Arctic tundra. The spill was among the largest in history considerably larger than the Exxon Valdez disaster in Alaska. A substantial amount of the spilled oil belonged to companies financed by the EBRD, which was aware of the poor condition of the pipeline at the time the loan was approved. The Bank should not have financed these projects without thoroughly assessing the pipeline and providing financing for needed repairs. A sustainable development policy would have placed pipeline repair ahead of oil field development as a priority for EBRD financing.

Formulating such a policy will require a considerable amount of time, energy and collaboration; the policy and subsequent guidelines for implementation will not materialize overnight. The EBRD should not act unilaterally, but should encourage participation from all the Central and Eastern European countries. Government officials, NGOs, the scientific community, and the general public should be invited to participate in conferences, workshops, and roundtable discussions to develop the policy.

The Bank should integrate the policy into its country, sectoral and regional plans, as well as into project development. At present, it considers projects only on their individual economic and environmental merits. A sustainable development policy would enable the Bank to identify a long-term program of projects that would provide equal or greater economic benefits without further damaging the environment.

Criteria and Standards for Sustainable Development

The EBRD should also develop criteria and standards to ensure that the projects it funds are consistent with its sustainable development policy. An initial set of criteria might include the following:

• Projects should use energy and other resources in the most efficient manner.
• Projects should foster diversity of production to avoid making extreme demands on the assimilative capacity of the region.
• Projects should incorporate clean production technologies that minimize waste and prevent pollution.
• Projects that require environmentally damaging government policies, such as energy subsidies, should be avoided.
• Projects should emphasize human resource development over intensive development of natural resources.
• Projects should reflect community-based development priorities, based upon decentralized and autonomous decisionmaking.
• Projects should contribute to solving global environmental problems, such as climate change, ozone depletion, loss of biodiversity, and pollution of international waters.

The EBRD has not explicitly committed itself to a set of environmental standards, though it implies in its Environmental Procedures that the standards of the European Union will serve as a baseline for its projects. The EBRD does not implement this policy, however, and Bank staff have stated that projects are not routinely required to meet EU environmental standards. The Draft Revised Environmental Procedures, recently released by the Bank, confirm that the Bank does not intend to hold projects to EU standards. The Bank should require projects to adhere, at a minimum, to EU standards, and to more stringent standards in special circumstances, such as in degraded or sensitive areas, or where required by national law.

Environmental Assessment at the Bank

To help ensure sustainable development, the EBRD must analyze the environmental impacts of its actions at the project, sectoral, regional, and global levels. Environmental assessments (EAs) are the Bank's principal tools for determining the environmental impacts of its actions, but the Bank has not sufficiently utilized them. Fewer than 5% of the Bank's projects have received full EAs.

Moreover, EBRD EAs typically do not contain all the elements of a full environmental impact assessment. They routinely fail to assess alternatives to the proposed project, including the important "no-action" alternative, and indirect impacts, such as offsite impacts. They also fail to provide for adequate public participation.

Sectoral and Regional EAs are also important tools for achieving sustainable development. Although the Environmental Procedures state that Sectoral and Regional EAs may be performed for development plans, sector-wide programs, or multiple projects, none have been conducted to date. A Sectoral EA of Russian oil and gas development might have alerted the Bank to the imminent Komi pipeline disaster. Sectoral EAs would also be useful bases for the development and implementation of the Bank's sector operations policies.

Regional EAs should be undertaken when a number of development activities are planned or proposed for a relatively localized geographical area. A Regional EA could have examined different energy and development strategies for Slovakia, and perhaps would have identified an economically attractive alternative to continuing along the path of nuclear power and heavy industry.

The EBRD should also consider the global impacts of its actions, including possible contributions to depletion of the ozone layer, climate change, and loss of biodiversity. Unlike the World Bank, the EBRD does not require any discussion of global impacts in its EAs.

EBRD Projects

CIEL's report is based largely on three case studies. Two of the projects are located in Slovakia--the ZSNP aluminum facility and the Mochovce nuclear power plant. The third case study concerns the development of oilfields in the Timan-Pechora Basin of the Russian Federation. These projects were selected because they demonstrate the need for both a sustainable development policy and significant changes in the Bank's Environmental Procedures. In all the projects, political and economic pressures have caused the EBRD to deviate from its written procedures. The projects also illustrate problems with the environmental and public participation procedures.

The ZSNP Aluminum Plant, Slovakia

In September of 1993 the EBRD approved a US$110 million loan and US$15 million equity investment for a new aluminum smelter in Ziar nad Hronom, Slovakia. As the region's largest employer, ZSNP provides jobs for over 6,000 people.

ZSNP is also one of the region's largest polluters. A bauxite waste site leaches heavy metals into the soil and groundwater, and the existing factory emits dust, SO2, NOx, CO, and fluorides far in excess of Slovak and EC air emissions standards. Off-site testing has revealed high concentrations of benzopyrene, arsenic, molybdenum, copper, nickel and chromium. Health problems, including congenital defects, allergies, and thyroid and lung diseases, are on the rise throughout the region.

Due to the highly polluting and energy-intensive nature of primary aluminum production, Slovak environmentalists favored either converting the plant to secondary aluminum production or closing the plant altogether. They also argued that the plant made no economic sense. Ideally, for aluminum production to be economically competitive, a cheap source of energy, labor, and raw materials should be available. With the exception of cheap labor, Slovakia has little competitive advantage on the international aluminum market.

Nevertheless, the EBRD decided to pursue the project, which already had been rejected by the World Bank and a number of private investors. Despite strenuous objections from environmen-talists, it was given fast track status, a protocol that is not provided for in the Bank's Environmental Procedures. Most of the procedures for public participation were curtailed: formal notification to the public about the ZSNP project, public scoping, and public meetings were dispensed with. Bank staff did conduct a pro formameeting with a small number of environmentalists a few days before the project was submitted to the Board, but by that time it was not likely the project would be altered.

The ZSNP project demonstrates that, when faced with financial pressures, the Bank is willing to forego at least some of its environmental due diligence. A sustainable development policy and stronger environmental procedures are urgently needed to help the EBRD withstand such pressures and ensure that each project receives the appropriate level of environmental analysis and public consultation.

The Mochovce Nuclear Power Plant

In 1993 the Slovak government approached the EBRD with a proposal to complete Mochovce, a Soviet-designed nuclear power plant, at a cost of US$1.2 billion. Approval of the project would make the EBRD the first multilateral lending institution to directly support nuclear power. The project has been the source of intense debate throughout Europe, with France and Germany favoring the project, and a group of smaller European countries, led by Austria, opposed.

If completed, Mochovce will be the first partially finished, Soviet-designed plant to be completed with a "retrofit" of western technology. There are serious questions whether this technology will operate according to its specifications under such conditions. VVER-440/213 reactors, similar to Mochovce, in the former German Democratic Republic were decommissioned immediately after reunification of Germany, after it was determined that retrofitting to meet German safety standards would be prohibitively expensive. In the neighboring Czech Republic, a VVER-440/213 reactor similar to Mochovce has had over 60 emergency shutdowns in just the last eight years.

Despite these concerns and the lack of a long-term spent fuel management plan, the Bank decided to pursue the project. The Bank screened Mochovce as a category A/1 project, requiring a full environmental assessment and an environmental audit. The Bank also com-missioned a least-cost study to determine if there are economically viable alternatives to the Mochovce project.

The Bank's least-cost study concluded that in most scenarios Mochovce would be less expensive than any other available option. Other studies, however, made different assumptions about future fuel costs and the potential for energy efficiency to reduce Slovakia's energy needs and concluded that cheaper alternatives existed.

From the start of Mochovce's EA process, public participation was handled poorly. The project sponsor's first attempt at scoping caused a public outcry. Scoping had to be reinitiated some months later because so many citizens interested in the project had been excluded. "Public" meetings turned out to be by invitation only. The project sponsor--Slovensky Energeticky Podnick (SEP)--initially refused to release critical decision-making documents, such as the least-cost analysis and nuclear safety study, or to hold public meetings in the countries adjoining Slovakia.

The completed EA did not address several key issues, including crucial safety concerns, liquidation of the nuclear reactors and spent fuel from the plant, and an environmental assessment of all alternatives, including the "no-action" alternative. Nevertheless, EBRD staff continued to support and defend the project.

During the public comment period following the release of the documentation, meetings were held in Slovakia and Hungary. At these meetings, project sponsors manipulated the time available for discussion, so as to limit critical comment, and repeatedly refused to address questions raised by participants. One meeting in Vienna had to be canceled because the project sponsors heard how many people planned to object to the project, and refused to attend.

In early 1995 Slovakia suspended negotiations with the EBRD. It did so, not in response to pressure from environmentalists, but out of concern over the high cost of the loan and the environmental conditionality. The EBRD insisted that, as a condition of the loan, Slovakia close Bohunice--an outdated and dangerous nuclear plant--and increase its domestic energy prices by nearly one-third. The Slovak government recently signed an inter-governmental accord with Russia to provide a US$150 million loan for the completion of Mochovce's first reactor bloc.

The EBRD justified the loan for Mochovce on the grounds that, if it did not make the loan, Slovakia would obtain financing to complete the plant without the environmental safeguards required by the Bank. Any attempt by Slovakia to complete the plant without all the necessary safeguards, however, would be strongly opposed by neighboring countries and the European Union. There is also no evidence that the EBRD ever resisted Slovakia's plan, or even offered to finance alternatives.

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