EBRD Should Push Central Europe Greener

During the financial and economic crises we've become so used to banks receiving billions' worth of taxpayer infusions with few conditions attached that it may seem unsurprising that the European Bank for Reconstruction and Development is looking for an extra €10 billion to expand its investments in Central and Eastern Europe.

The EBRD is, however, not your average bank, but a multilateral development bank with the unique mission of fostering transition toward open market-oriented economies and acting as a catalyst of private enterprise in the former Eastern bloc by investing in projects where financing would not otherwise be available. This request for additional capital from its shareholders – including EU members, the United States, and Japan – is therefore not a bailout but is supposed to further the EBRD's promotion of transition in our region and build on the nearly €8 billion that the EBRD lent in the region last year.

What is now clearer than two decades ago when the bank was founded, however, is that market economies alone are not enough to meet the social and environmental challenges of the 21st century. The EBRD's own Life in Transition survey in 2007 included the alarming finding among 29,000 respondents across the region that trust in society had plummeted since 1989. While many communist-era environmental nightmares have been ameliorated, the transition countries are driving – at hyper speed – unsustainable trends of rising road transport and waste production, coupled with an enduring legacy of wasteful energy production and consumption. With Russia the fourth largest global greenhouse gas emitter, and countries such as Azerbaijan, Kazakhstan, Ukraine, and Uzbekistan among the world's most energy-intensive, action urgently needs to be stepped up.

Yet the EBRD's new strategic overview for 2011-2015, to be agreed upon at a board meeting this month, provides too few answers and too much business as usual to show how it will tackle these issues.

The strategy does aim to support transition to an energy-efficient, low carbon economy, but it is hard to imagine – given the scale of change needed and the inevitable time that this would take – how promoting a low-carbon economy can be reconciled with projects to expand, extend the life of, or even build new coal power stations, not to mention expanding airports, building new motorways, and building oil and gas pipelines.

Yet this is exactly what the EBRD is planning to do, with projects like new coal power plants in Kazakhstan and the Nabucco gas pipeline – with a capacity of up to 31 billion cubic meters per year and price tag nearing 8 billion euros.

Instead of investing in such projects, the EBRD needs to make use of scarce public financing to lead new markets in new renewables and energy efficiency investments and phase out support for fossil fuel investments, particularly given the larger scale of fossil fuel investments and the likelihood that they will crowd out new renewables financing.

The bank's new priorities also include helping private industry become more diverse and competitive. But corporate sector projects are another area in which project selection and appraisal needs to be tightened up if the EBRD is to avoid repeating earlier mistakes, like its series of loans to steel giant ArcelorMittal (MT) for environmental improvements, totalling just over $550 million over the last 10 years, which has brought few visible results as local communities continue to breathe choking pollution and raises the question whether the world's largest steel company could not have accessed financing from other sources.

Another important direction for EBRD lending will be financing micro-, small- and medium-size enterprises through intermediate financial institutions. International development finance channelled through commercial banks or private equity funds has long been a concern for civil-society organizations, particularly because next to nothing is known about where this money ends up, let alone whether it is supporting projects leading to social and environmental well-being

With such financial intermediaries now accounting for nearly 40 percent of its annual portfolio, the bank needs to provide more assurance that this money is actually going to reach its intended objectives, as opposed to being hoarded by Western commercial banks shoring up their balance sheets or using this finance to leverage larger investments elsewhere.

In 2009, huge amounts of public money were poured into black holes in the name of tackling the financial and economic crises, but there was growing agreement that financial activities need to be much more tightly scrutinized and regulated.

This year, concrete steps must be taken to make that a reality, combining the lessons of the financial crisis with the imperatives of creating a low-carbon, socially just society. The EBRD's shareholder countries now have a prime opportunity to do just that, if only they will seize it instead of handing the bank a blank check.