Komi Republic Oil Field Development, Russian Federation

Polar Lights and KomiArctic are oil field development projects located in the Komi region in Russia. Both projects rely upon the severely degraded Kharyaga-Usinsk pipeline. In early 1994 the pipeline began leaking, and in August of 1994 a dike containing the leaked oil broke, spilling an estimated 270,000 tons of crude oil onto the Arctic tundra. Projects receiving EBRD support accounted for as much as 25% of the spilled oil. The Komi spill was over three times the size of the Exxon Valdez disaster, making it one of the largest releases of oil into the environment on record.

Environmental assessments and audits were commissioned by the Bank, but they only covered the project sites and excluded the pipeline. Had the EBRD assessed the pipeline, it is unlikely the projects would have been approved by the Board. CIEL's requests for copies of the EAs were denied by both the Bank and the project sponsors. CIEL could only view the Polar Lights EA at Conoco headquarters in Houston, Texas.

By supporting these projects, the EBRD has contributed to a major environmental disaster. The Bank claims it had no control over the condition of the pipeline, which was within the exclusive control of Komineft. Komineft, according to the Bank, refused to even allow inspection of the pipeline. It appears that the Bank did make efforts to include infrastructure improvement as part of the projects, but the Russian government did not consent. At that point, the EBRD should have refused to make the loans.

After receiving a request for help in January 1995, the EBRD and the World Bank agreed to jointly finance a US$140 million emergency loan to fund cleanup efforts. While the spread of the spill appears to be temporarily in check, additional ruptures have appeared in the pipeline, and the temporary containment dikes will be further tested by seasonal floods. The Komi spill demonstrates, in the starkest terms, the need to implement the EBRD's mandate for sustainable development.

Promising New Directions in Bank Lending

In the past year the EBRD has begun several promising new initiatives. Chief among these are two new departments within the Bank, the Energy Efficiency Departmentand the Municipal and Environmental Infrastructure Department. The Bank has also explored some innovative financing mechanisms for environmental investments, including environmental loan guarantees and "green equity."

The Energy Efficiency Department

Despite the tremendous savings and environmental benefits that can be obtained from energy efficiency, less than 3% of the EBRD's energy sector lending has been for demand-side efficiency. The Bank has finally recognized this problem and established the Energy Efficiency Department (EED) in October of 1994 to identify and develop energy efficiency projects. In its first year of operation, the EED developed several different types of programs and projects, including direct investments in energy efficiency technology, dedicated credit lines for energy conservation, and regional multi-project facilities.

The market for energy efficient technologies for the Bank's countries of operation is quite large, with estimates ranging from US$40 to US$55 billion. How successful the EED will be in tapping this potential market is not clear, although projected funding levels for EED projects are encouraging. The EED is precisely the type of initiative needed for the Bank to fulfil its mandate to promote environmentally sustainable development.

Municipal and Environmental Infrastructure Department

In June of 1995 the Bank created the Municipal and Environmental Infrastructure Unit to take charge of the Bank's environmental programs. The Bank currently has two regional environmental programs, the Baltic Sea Programme and the Danube River Basin Environmental Programme. The Baltic Sea Programme is a joint effort by Baltic countries to address the sewage, industrial, and hazardous waste currently being discharged into the Baltic by investing in environmental infrastructure, environmental policy development, and institutional reform. The Danube River Basin Environmental Programme, which was formed to identify and address the heavy pollution discharge from the Danube into the Black Sea, establishes an integrated strategic management plan for improving the environment of the river basin.

The Bank has signed four water treatment projects as part of the Baltic and Danube programs: a 23.4 million ECU loan to improve water supply and waste water management in Tallinn, Estonia; a 10.6 million ECU loan to rehabilitate waste water treatment facilities in twelve other Estonian municipalities; an 11.5 million ECU loan to assist the municipal water authority in Kaunus, Lithuania; and a 22.8 million ECU loan to upgrade the water supply and waste water treatment facilities in five Romanian municipalities. The Bank has also commissioned a number of regional and sectoral studies and initiated several technical cooperation projects in the participating countries.

Environmental Financing Initiatives

Recently the Bank has used several other creative mechanisms to help finance environmental projects. It maintains the Secretariat of the Project Preparation Committee, which coordinates funding from donor countries and international financial institutions for environmental projects in the region. The EBRD also chairs the Working Group on Environmental Project Financing , which is investigating ways to enhance environmental investments through such innovative measures as environmental loan guarantees and "green equity."

The EBRD Environmental Procedures

The EBRD Environmental Procedures were adopted in January of 1992. Discussions with NGOs throughout the preceding year led the Bank to strengthen the procedures in a number of areas. Still, they fall far short of what is needed to achieve sustainable development, particularly in the areas of information disclosure and public participation.

In practice, the Bank sometimes cuts corners in implementing its Environmental Procedures or ignores them altogether, often as a result of perceived time constraints or financial pressures on the borrower. By failing to follow its procedures, the Bank sacrifices environmental protection for expediency and undermines its own commitment to rule of law.

Purpose of the Environmental Procedures

The Environmental Procedures are intended to guide Bank staff in exercising environmental due diligence to ensure that each project is environmentally sound. More specifically, they aim to ensure that decisions to approve or disapprove projects are made with awareness of each project's environmental implications; to avoid potential environmental liabilities; to account for environmental costs as well as other costs and liabilities; and to identify opportunities for environmental enhancement. (EBRD, Environmental Procedures (adopted Feb. 13, 1992) at iii.)

These aims, while important, are not adequate to ensure that Bank-financed projects will be consistent with the Bank's mandate to promote sustainable development. The Environmental Procedures provide no substantive guidance as to the types of projects that will contribute to sustainable development and those that should be avoided, nor do they require the integration of environmental considerations into the earliest phase of project identification, selection, and design. Rather, environmental consequences are considered on a project-by-project basis, often with little apparent regard for the cumulative and indirect effects they may have on the environment.

A review of the Bank's environmental assessment and project approval processes reveals that the Bank does not always meet even the limited aims of its Environmental Procedures . Relatively few projects are subjected to full EA, even when they clearly appear to fall within the Bank's list of projects requiring full EA or within similar lists in national EA laws.

Procedures for Environmental Assessment

The EA process is the principal mechanism for evaluating a project's environmental consequences and is critical for implementing the goals of sustainable development. According to the EBRD Environmental Procedures , the project sponsor is responsible for preparing the EA. Project sponsors frequently lack experience with EAs and may fail to develop and release important information or attempt to limit the participation of concerned citizens and NGOs.

It is difficult to assess whether project sponsors withhold or fail to develop significant information about potential adverse impacts. Consultants conducting EAs have occasionally been prevented from reaching conclusions because of lack of data. Whether this is due to the haste with which some assessments have been prepared or to the deliberate withholding of information by the project sponsor, it is unacceptable.

Initiation and Screening

Initiation and screening occur at the earliest point of the environmental investigation--when the need for an environmental assessment or environmental audit is determined. During screening, the Environmental Staff should ascertain the purpose and need for the proposed project, identify tentative alternatives, and determine the appropriate level of environmental review. Based on preliminary environmental information provided by the project sponsor, the staff must decide whether a proposed project will require full EA, some intermediate level of assessment, or no assessment at all.

During screening, the staff assigns each project an A, B, or C to designate the level of assessment the project is to receive and 0 or 1 to indicate whether an environmental audit is required. Bank staff are guided in screening by lists of specific types of projects for which the level of assessment is predetermined. These lists are intended to provide examples only and do not preclude assessment of unlisted projects.

If a project is designated to receive a different level of assessment under Bank procedures than under national law, the Environmental Procedures state that the more stringent of the two listings determines the level of assessment. Nevertheless, many projects have been screened into Category B even though they either are listed by the Bank as Category A-type projects or require full EA under national law. Sometimes projects are screened into Category B even when full assessment is required by both Bank procedures and national law.

The Environmental Staff has explained that more projects are not screened into Category A partly because many Category B projects receive environmental audits, which uncover much of the information that would be sought in an assessment. This explanation ignores the different purpose and nature of environmental assessments and environmental audits. The Environmental Procedures clearly state that one cannot substitute for the other. Furthermore, audits are not made public and provide no opportunity for public participation.

The difference in treatment between Category A and Category B projects is significant. Projects screened into Category B receive a lower level of assessment and do not require that the public participate in, receive information about, or even be notified about the assessment.

Scoping

Scoping is a process for creating a dialogue between the project sponsor, government officials, and the public to determine the scope of the environmental assessment. It should be an open process designed to ensure that important issues are identified early in the EA process.

The Environmental Procedures only require scoping for Category A projects. They identify four types of actions involved in the scoping of an EBRD EA: identifying known environmental issues; identifying the concerns of all interested parties; setting up meetings between interested parties; and preparing the Terms of Reference and selecting experts to undertake the EA. In addition, environmental assessments should include the analysis of environmental costs in economic terms.( Id. at 30-31. )

As illustrated by the ZSNP and Mochovce case studies, project sponsors have not consistently fulfilled these requirements. The ZSNP aluminum smelter project included no public scoping whatsoever. The project sponsor for the Mochovce nuclear power plant project made only a minimal effort to comply with the Bank's requirements by sending a draft table of contents for the EA to a number of NGOs for comment. The general public was not notified about the project and had no opportunity to comment during scoping.

Alternatives

The importance of investigating alternatives to the proposed activity cannot be overstated. In fact, most environmental assessment laws, including the laws of Central and Eastern Europe, require a thorough analysis of alternatives, including the important "no-action" alternative.

To generate alternatives, it is necessary to define, at the earliest stage of the EA, the purpose and need of the proposed action. All alternatives that would fulfil thepurpose and need should be considered in the EA. The purpose and need should be stated broadly to avoid excluding desirable alternatives. The no-action alternative should be included to provide a baseline for comparing and contrasting the impacts of other alternatives, including the proposed action.

The EBRD's Environmental Procedures do not require that the EA contain a statement of purpose and need, and it is unclear whether the EA must identify and discuss alternatives to the proposed action. Without alternatives, EAs cannot identify the least-cost approach, which is very important in energy planning, where energy efficiency and conservation are frequently less expensive than building new generating capacity. The EAs CIEL has examined do not discuss least-cost.

The least-cost study for Mochovce was conducted independently of the EA. As a result, it did not consider all the impacts of the project, and could not account for all environmental and social costs associated with the proposed project and its alternatives.

Impacts

EAs should evaluate three types of impacts: direct, indirect, and cumulative. Indirect and cumulative impacts can be as severe as direct impacts, but are often more difficult to identify, making their consideration in the EA all the more important.

EBRD EAs do not explore all foreseeable indirect and cumulative impacts, even when they may be very significant. For example, the EAs for the KomiArctic and Polar Lights oil field development projects in Russia did not include an assessment of the Kharyaga-Usinsk pipeline, even though it was widely known that the pipeline was leaking badly and might rupture. Had the pipeline been included in the EAs, it seems highly unlikely the project would have been approved by the Board.(Bank staff say the pipeline was not included in the EA because it was not within the project boundaries. But the procedures clearly state that one reason to conduct an environmental assessment is to identify impacts outside the area occupied by the project. EBRD, Environmental Procedures 26 (adopted Feb. 13, 1992). The EBRD is planning to prepare a full EA for the Chernogorskoye oil field development project in the near future. Incredibly, the Environmental Staff cannot say whether that EA will include assessment of the pipeline.

Assessment of global impacts relating to such global environmental problems as climate change and depletion of the ozone layer is now required by a growing number of countries and institutions, including the World Bank. The EBRD, however, does not require that global impacts be assessed in its EAs.

Mitigation and Remediation

Having examined all reasonable alternatives that satisfy the purpose and need, and their impacts, the EA must identify mitigation and remediation measures to reduce adverse impacts and enhance beneficial ones. EBRD EAs often contain detailed recommendations for mitigating identified adverse impacts and remedying existing environmental damage. The Bank appears to take these recommendations seriously, frequently requiring mitigation and remediation that should significantly improve the environmental performance of projects it finances.

Mitigation and remediation needs that are identified as necessary during environmental review may either be incorporated into loan agreements as covenants or contained in a separate remediation agreement. The ZSNP project involved both types of agreements. Originally, the Bank planned to sign the loan agreement and disburse the first tranche of funds for ZSNP before the remediation agreement was completed and signed. As the project sponsor would already have achieved its main objective, this would have eliminated the borrower's main incentive to undertake potentially costly mitigation and remediation measures. However, due to complications apparently unrelated to remediation, the loan agreement was delayed and was finally signed at the same time as the remediation agreement, nearly a year after approval by the Board.

The draft agreement generally responds to the environmental recommendations contained in the ZSNP environmental assessment and audit, but it lacks the specificity which is needed for proper implementation and enforcement of environmental actions. For example, the agreement stipulates that a bentonite wall must be built around the "red mud" waste pile, but it neglects to incorporate the recommendation of the assessment that it encompass the fly ash area, which is suspected of leaching arsenic.

It is also troubling that the Bank is unwilling to make the remediation agreement public, especially since the Bank proposes to include the public in post-completion monitoring of ZSNP. The Bank gave the project sponsor veto power over public dissemination of the agreement.

Environmental Audits

The EBRD uses environmental audits to determine the likelihood and extent of potential liabilities at sites with ongoing operations or which require property transfer. For existing operations, audits also assess compliance with applicable environmental laws and regulations. The decision whether an audit is necessary is made at the screening level. The Environmental Procedures differentiate between environmental audits and assessments, stating that "they address different concerns, and are in no way substitutes for each other." Projects frequently require both kinds of investigation.

The project sponsor must develop a Management Action Plan that addresses the conclusions and recommendations of the audit. The Environmental Procedures do not require the Environmental Staff to evaluate and recommend changes to the plan, however, or to monitor its implementation

Environmental audits provide no avenues for public participation, and the Bank does not disclose audit results. There is no mechanism comparable to scoping for environmental audits, and the section of the Environmental Review Memorandum which evaluates the adequacy of public participation does not apply to environmental audits. Audits which require additional phases of investigation appear to be similar in scope to full EAs. In these cases, especially where contamination has been identified, there is no rationale for prohibiting full public disclosure and participation.

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