DOCUMENT OF THE EUROPEAN BANK
FOR RECONSTRUCTION AND DEVELOPMENT
BDS03-17 (Addendum 1)
22 May 2003
SLOVENIA
EBRD/GEF ENVIRONMENTAL
CREDIT FACILITY
This document has a restricted distribution and may be used by the recipients only in the performance of
their official duties. Its contents may not otherwise be disclosed without the Bank's authorisation.
TABLE OF CONTENTS
Page
TABLE OF CONTENTS ........................................................................................... 1
ABBREVIATIONS/CURRENCY CONVERSIONS............................................... 2
1.
THE CLIENT AND THE PROJECT.............................................................. 4
1.1 BACKGROUND ............................................................................................ 4
1.2 CREDIT FACILITY ....................................................................................... 5
1.3 TECHNICAL CO-OPERATION ...................................................................... 6
1.4 FUTURE STRATEGY .................................................................................... 7
2.
KEY TERMS AND CONDITIONS................................................................. 7
3.
RATIONALE FOR THE BANK'S INVOLVEMENT .................................. 8
3.1 TRANSITION IMPACT AND BANK STRATEGY .............................................. 8
3.2 ADDITIONALITY ......................................................................................... 9
3.3 ENVIRONMENT ........................................................................................... 9
3.4 PROCUREMENT ........................................................................................ 10
3.5 MEASURING / MONITORING SUCCESS ...................................................... 10
4.
FINANCIAL / ECONOMIC ANALYSIS ..................................................... 11
5.
KEY RISKS AND SENSITIVITY ANALYSIS............................................ 12
5.1 SENSITIVITY ANALYSIS / RISKS ................................................................ 12
5.2 PAST
EXPERIENCE............................................................................12
ANNEXES ................................................................................................................. 15
ANNEX 1: EU PRE AND POST ACCESSION ASSISTANCE ...................................... 15
ANNEX 2: SUMMARY OF DEMAND STUDY AND TABLE OF PROJECTS ................ 18
ABBREVIATIONS/CURRENCY CONVERSIONS
BAS
Business Advisory Services programme
DRB
Danube River Basin
EU European
Union
EUR Euro
FAO
Food and Agriculture Organisation of the United Nations
GEF
Global Environment Facility
ISPA
Instrument for Structural Policies for Pre-Accession
Phare
Poland-Hungary Aid for Restructuring the Economy programme
PB Participating
Bank
PP&R
Procurement Policies & Rules of the EBRD
PTSU
Procurement & Technical Services Unit
SAF
Standard Application Form
SAPARD
Special Accession Programme for Agricultural and Rural
Development
SIT Slovenian
Tolar
TC Technical
Co-operation
TMG
TurnAround Management Group
USD US
Dollar
Exchange rates:
USD EUR: 0.92
2
SUMMARY FACT SHEET
SLOVENIA
EBRD / GEF ENVIRONMENTAL CREDIT FACILITY
Client:
Potential clients are various commercial Slovenian banks.
EBRD Transaction:
EBRD to provide senior loans in total of up to EUR 45 million to
participating commercial banks in Slovenia for on-lending to environmental
investment projects. Participating banks will receive a fee and the sub-
borrowers will receive grant support, both provided by the GEF for
qualifying projects. EBRD will only take the risk of the participating banks.
Project Description /
Establishment of an environmental credit facility, where local banks would
Business Purpose:
provide loans to private sector companies and smaller municipalities for
investment projects that would reduce water pollution entering the Slovenian
portion of the DRB.
EBRD funds would be blended with GEF grant funding. Grant support
amounting to USD 9 million would be used to provide incentives to sub-
borrowers as well as administration fees to the local banks for participation in
this project.
This project is designed as a pilot project to test the viability of the concept in
Slovenia for further replication in other Danube River Basin countries, which
include the Czech Republic, Slovakia, Hungary, Croatia, FR Yugoslavia,
Bosnia and Herzegovina (middle basin); and Romania, Bulgaria, Moldova
and the Ukraine (lower basin).
This is the first example of GEF working through the private sector in its
focal area of international waters. It is further the first GEF co-financed
operation with the EBRD
Associated TC (terms
There would be two types of consultancy services, both funded through the
of TC reimbursement):
non-reimbursable GEF grant:
Technical assistance and training (USD 602,900):
· If need be, assistance in developing solutions to water pollution projects
will be made available to a range of industrial, agricultural and municipal
entities including (a) assistance in identifying the best solution to water
pollution problems, (b) ensuring cost effectiveness in the selection of the
appropriate technology (c) structuring any required investments and, (d)
assistance in the process of loan application and the formulation of
proposals (USD 540,000).
· Marketing campaign to inform potential sub-borrowers throughout
Slovenia about the Facility (USD 32,500).
· Information dissemination activities related to the Facility to inform a
wide range of stakeholders about the Facility and pollution reduction
results (USD 30,400).
· Technical assistance and training will be provided by the TurnAround
Management Group ("TMG")/Business Advisory Services ("BAS")
programme, which is already operating in Slovenia. As with the regular
BAS programme, companies using this assistance will pay half of the
costs. The operating costs for the BAS programme will be provided
through the regular TMG/BAS donor funding sources.
Environmental expert (USD 304,750):
· The environmental expert will ensure that the objectives of the Facility
3
are met by checking and confirming the eligibility of sub-projects against
the pre-agreed set of criteria and by making recommendations in regards
to the environmental aspects of the project.
· In addition, the environmental expert will ensure that for municipal
projects to be financed under the Facility, EBRD and local procurement
rules have been followed.
· These services are to be provided by an independent environmental
expert with offices in Slovenia. The environmental expert will be
selected and supervised by EBRD.
In addition to the above, a total of USD 124,691 in TC funds (USD 87,284
from GEF and USD 37,407 through EBRD's framework contract with FAO,
managed by the EBRD Agribusiness Team) were used to prepare the project.
Of this amount USD 18,250 were used by the TMG/BAS programme in
Slovenia to undertake a demand study, while the rest was used to employ
specialists from the FAO to prepare the Project Brief. This is the main
document submitted to GEF for approval of the whole project.
Key Parties Involved:
· The Global Environment Facility, a multidonor facility established to
assist in the protection of the environment and promote environmentally
sound and sustainable development.
· Slovenian banks
· TurnAround Management Group
· Independent environmental expert
1. THE CLIENT AND THE PROJECT
1.1 BACKGROUND
The EBRD and the GEF are proposing to establish an Environmental Credit Facility
for Slovenia. EBRD would provide credit facilities to local banks and the GEF would
contribute grant support to the Facility. The local banks would on-lend money to
private sector companies and smaller municipalities planning to undertake
investments which would reduce water pollutants entering the Slovenian portion of
the Danube River Basin ("DRB"). GEF has approved a total of USD 9.9 million in
grant financing. USD 9.0 million GEF grant funding would be blended with up to
EUR 45 million EBRD funds on a project-by-project basis. The GEF grants would be
used to provide financial incentives to local private sector companies and smaller
municipalities as well as administration fees to local financial institutions to
participate in this project. The remaining grant funding will be utilised for training,
technical assistance and information dissemination.
The project contributes to the implementation of the "Convention for Co-operation for
the Protection of Sustainable Use of the Danube River", which addresses the major
transboundary environmental issues in the DRB. So far, eleven DRB countries,
among them Slovenia, have signed the Convention. The DRB is a priority area for
GEF support.
The GEF is an independent international financial mechanism created to provide grant
financing from multilateral sources to environmental projects in the areas of bio-
diversity, climate change, ozone depletion international waters, land degradation and
persistent organic pollutants. GEF provides both grants for financing investment
projects and grants for preparing projects. Since its creation in 1991, the GEF has
4
allocated USD 4 billion in grants to support more than 1,000 projects in 140
developing nations and economies in transition. GEF projects are implemented by the
United Nations Development Programme, the United Nations Environment
Programme, the World Bank and the Asian Development Bank (Implementing
Agencies). The EBRD currently acts as an Executing Agency of the GEF, meaning
that it cannot receive investment funds directly from the GEF but must work through
one of the Implementing Agencies. The EBRD can receive project preparation funds
directly from the GEF and has done so for three projects. The EBRD hopes to receive
the status of an Implementing Agency from the GEF in the near future.
In line with Slovenia's EU accession process, its environmental legislation is being
adapted to reflect EU standards. Slovenian companies and municipalities have an
urgent need to invest in water pollution reduction projects due to meet tight legislative
deadlines for emission reduction, stricter enforcement and monitoring as well as an
increasing waste water tax burden. This has been confirmed in a demand study,
which was completed by the TurnAround Management Group's ("TMG") Business
Advisory Services ("BAS") programme in Slovenia in May 2002. According to this
study, demand for financing of water pollution reduction investments exceeds by far
the supply of available financing for this type of investment. Further information on
the demand study and potential sub-projects is included in Annex 2.
1.2 CREDIT FACILITY
The Facility will be demand driven and EBRD funds will be allocated to local banks
committed to the Facility. Loans will be granted at commercial rates. Separate loan
agreements will be concluded with each participating bank. It is expected that 4-6
banks will participate in the Facility and that each will receive between EUR 5-15
million, depending on the demand, the individual credit analysis, the due diligence
and the overall exposure of EBRD to the banks or their groups.
Sub-borrowers will be private companies, smaller municipalities or municipal
companies. Examples of potential sub-projects financed through this Facility include
the recycling of cooling waters at a glass production company, the upgrading of waste
water treatment at a textile company, the re-use of waste waters at a pulp and paper
mill, the construction of a new biological waste water treatment facility at a food
processing company and the upgrading of a municipal waste water treatment plant.
Sub-projects will come from existing companies. Sub-borrowers have to pass the
participating banks' financial and legal due diligence and sub-projects have to comply
with the Facility's environmental eligibility criteria to qualify for financing and grant
support from the Facility. Sub-borrowers will mostly be already existing and
creditworthy clients of the banks. Maximum sub-loan size would be EUR 3 million,
on an exceptional basis the amount could go up to EUR 4.5 million. According to the
demand study, the majority of the projects will be in a range from EUR 100,000 to
EUR 1,000,000.
It is expected that the majority of sub-projects will come from the private sector and
that overall less than 25% of the Facility will be allocated to public sector projects. A
ceiling of 50% of the total loan amount granted to each participating bank will apply
to public sector projects.
The USD 9.0 million GEF investment grant will be used to provide incentives to both
sub-borrowers and local banks to participate in the Credit Facility.
5
· Sub-borrowers: The primary objective of the Credit Facility is to speed up
necessary water pollution reduction investments in Slovenia. Sub-projects that
will help borrowing companies meet relevant national and EU regulatory
requirements earlier that the legislative deadline or that reduce emissions beyond
the standards required by relevant EU/national legislation, will be eligible. To
induce sub-borrowers to make such investments, they would receive a completion
fee. The fee would become available only after an independent local
environmental expert has confirmed successful implementation and completion of
the environmental project.
· Participating banks: Fees will be paid to the participating banks as an incentive to
roll out this Facility. In addition, it will compensate them for restricted use of
funds and additional administrative requirements such as close co-operation with
the environmental expert and reporting tasks. For outstanding amounts on-lent to
sub-borrowers, banks will receive an administration fee, up to a maximum of five
years, which will be deducted from the margin applied to the commercial loan. In
addition, they will receive a completion fee following the successful
implementation of the sub-project.
Two thirds of the USD 9.0 million investment grant available will be allocated to the
sub-borrowers and one third to the local financial institutions.
1.3 TECHNICAL CO-OPERATION
Training and Technical Assistance
To ensure that the objectives of the Facility are met, an independent and locally based
environmental expert will be hired. The expert will check the environmental
eligibility of each proposed sub-project, confirm the environmental monitoring plan
and undertake technical monitoring of investment projects financed by the Facility. In
addition, the environmental expert will have to confirm each sub-project's successful
implementation, which will entitle the borrower to receive the completion fee.
Project preparation assistance will be provided by the donor financed TMG/BAS
programme, which is already active in Slovenia. Activities will include assistance in
process optimisation and wastewater minimisation within companies; ensuring cost-
effectiveness in the selection of the most appropriate technology; scoping borrowing
requirements and preparation of loan application and formulation of technical
proposals to ensure conformity with GEF, EU and national environmental criteria.
This assistance will be made available to any industrial, agricultural or municipal
entity and does not necessarily have to result in a loan application to one of the
participating banks.
Information Dissemination
To reach clients beyond the established client base of the participating banks and to
ensure that a great number of potential borrowers the Slovenian portion of the DRB
are informed about the Facility, national-level marketing workshops will be organised
and related information distributed. In addition, funding will be available for
informing a wide range of stakeholders and the general public to raise public
awareness, promoting the replication of the project concept and the innovative
technologies demonstrated by the project as well as sharing experiences and lessons
learned with its stakeholders. These activities will be carried out mainly by the
TMG/BAS programme.
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GEF has approved, in principle, an amount of USD 907,650 for technical co-operation
for this Facility to finance the environmental expert and the TMG/BAS programme
activities.
1.4 FUTURE STRATEGY
The Slovenia project has been designed as a pilot to test the concept of reaching sub-
borrowers planning to undertake investments in water pollution reduction projects and
supporting them with grants and access to financing through local financial
intermediaries. Slovenia was chosen because of its advanced and solid banking
system and its environmental legislation, which is being updated to be in line with EU
accession requirements.
Provided the concept can be implemented successfully, GEF has indicated that they
may wish to replicate it in other DRB countries and provide similar grant support to
complement EBRD financing. The replication potential is implied by the similarities
in other DRB countries in environmental and some industrial/socio-economic terms.
After successful implementation of the pilot project, EBRD plans to roll out a follow-
on project in other selected countries in the Danube River Basin, including Romania
and Bulgaria. EBRD is investigating which of the countries are most suited for
replicating the project. A framework facility might be proposed, which would cover a
number of DRB countries. In addition, this pilot project could open the door for
future water pollution reduction projects to be implemented between EBRD and GEF
in other regions.
2. KEY TERMS AND CONDITIONS
Transaction
EBRD to provide senior loans in total of up to EUR 45
million to participating commercial banks in Slovenia.
Participating banks, as well as the sub-borrowers, will
receive financial incentives provided by the GEF grant for
qualifying projects.
Financing Plan
Separate loan agreements to be entered into by the Bank with
selected commercial banks, such banks to be determined
after the individual due diligence. It is expected that
individual loan amounts will be in a range of EUR 5 15
million and that 4-6 banks will participate. Loan amounts
will depend on the demand, the individual credit analysis, the
due diligence and the overall exposure the EBRD has with
the banks or their groups.
Repayment
Repayment of equal semi-annual instalments, to begin 24
months after signing of the loan agreement. Tenors will
have an upper limit of 10 years. The majority of the loans
are expected to have tenors of 5 years.
Use of Proceeds
Financing will be provided to private companies as well as
smaller municipalities for investment projects, which reduce
water pollution flowing into the Slovenian portion of the
Danube River. A ceiling of 50% of the total loan amount
granted to each participating bank would apply for public
sector projects. It is expected that less than 25% of the
Facility will be allocated to public sector projects. Sub-
7
projects will have to meet the credit criteria of the
participating banks as well as the environmental eligibility
criteria. The independent environmental expert will have to
confirm that the latter have been met.
Conditions to subscription/ Standard conditions for loan agreements.
disbursement
· Confirmation that the banks have approved qualifying
sub-loans for a total amount of at least equivalent to the
requested disbursement amount.
· Confirmation by the environmental expert that these
sub-loans meet the environmental eligibility criteria.
Key Covenants
Covenants applicable to the banks will focus on project
management and reporting issues, in addition to the usual
financial and operational covenants (e.g. capital adequacy,
liquidity, and total equity). For the sub-projects, specific
covenants will apply for environmental eligibility criteria.
Other Material Agreements Policy Statement
Environmental Eligibility Criteria
Contract and Terms of Reference for consultants
Documentation Approach
Standard loan documentation.
3. RATIONALE
FOR
THE
BANK'S INVOLVEMENT
3.1 TRANSITION IMPACT AND BANK STRATEGY
Transition impact potential is good as the project may have demonstration effects
throughout the region on how to provide private sector financing through local
financial intermediaries for investments resulting in environmental compliance. The
project deals with compliance issues of particular complexity as it addresses
transboundary pollution problems. By working together with the environmental
expert and the specialists provided through the TMG/BAS programme, participating
banks will increase their experience in financing environmental investments thus
potentially enlarging the number of products that they can offer to their clients. The
project will further promote and demonstrate environmental good practice to private
and public sector entities, in Slovenia and the whole region. As the majority of sub-
loans are anticipated to be below EUR 1 million, it is expected that many SMEs will
access the Facility. The demonstration effect on how environmental investments can
be financed will be particularly important for this group, as SMEs are among the
biggest polluters per unit of output.
The project is in line with the Bank's strategy for Slovenia by contributing to product
innovation in the financial sector and to lending to local companies. Including several
participating banks in the Facility will ensure competition among banks. The project
supports the Bank's Environmental Policy and will promote the implementation of
harmonised environmental regulations and standards following EU requirements.
Risk to transition might lie in potential market distortions through the provision of
subsidies, the performance of the participating banks and the uncertain sustainability
of the programme once the subsidies dry up. To minimise potential market
distortions, grant funds have been reserved to carry out broad based marketing
campaigns to reach potential sub-borrowers all over the country. Including several
participating banks in the Facility will have the same aim. Local banks, some of
8
which already have a business relationship with the EBRD, will be carefully selected,
screened and monitored to ensure good performance.
Sustainability without GEF support will depend on environmental legislation and
enforcement in each country. In EU accession countries, pressure on companies to
comply with environmental standards and norms will continuously be stepped up over
the next years. Firms will sooner or later be forced to invest in environmental projects
to reduce fines and certain production costs. By then, participating banks will have
acquired skills in financing environmental projects.
As to the replicability of the pilot scheme in other DRB countries, banks welcome the
access to long-term financing, which is otherwise still difficult to obtain, particularly
in less developed countries in the region and for this type of investments. The
participating banks might value the acquisition of new skills, the enlargement of their
product line and the extension of their client base. In less developed countries of the
DRB, these aspects are expected to be even more important.
3.2 ADDITIONALITY
Additionality is achieved by promoting environmentally oriented operations, which
might not be undertaken at this point in time without the provided grant support, thus
speeding up the clean up of tributaries of the Danube River. Subsidised funding for
this type of projects appears to be limited. The local, state-owned EcoFund provides
subsidised financing for environmental projects, but it can not satisfy the demand for
environmental investment financing. In addition, the EcoFund has to comply with
Slovenian state-aid rules and sub-borrowers have to meet the set conditions. EBRD's
involvement is additional because of its capacity to mobilise grants and combine them
with commercial financing. Further, EBRD has the capacity to structure the
distribution of these funds in an efficient and less distorting way than other
mechanisms by co-operating with existing financial intermediaries in the region.
Additional value is provided through the Bank's TMG/BAS programme.
This is one of the limited examples of GEF working through the private sector. GEF
has stated that one of its key priorities is to increase the involvement of the private
sector in GEF financed activities. Benefiting from EBRD's position in the region,
GEF funds will be channelled through an existing network of financial intermediaries
to the sub-borrowers in an efficient way. The co-operation between the two
institutions will result in leveraging GEF grants five times. GEF has stated that this is
considerably higher than the average leverage, estimated at 1:2, it has achieved with
its projects in the past.
The proposed Facility is additional to the EU accession and structural adjustment
funds. While EU funds are substantial, they can not cover all the needs of the country
in respect to environmental financing. Additional funding is expected from other
financing sources such as the EBRD. Annex 1 provides further information.
3.3 ENVIRONMENT
This project, which is in essence an environmental project, is well in line with the
Bank's Environmental Policy. It will provide financing for the alleviation of
environmental problems, utilise EBRD's operations to contribute to the
implementation of multilateral environmental agreements and contribute to the
9
building up of the necessary capacity for environmental management in its countries
of operation. In addition, it matches EU requirements and should help Slovenian
companies and municipalities meet EU water quality standards and norms.
Participating banks will increase their knowledge of extending financing to
environmental projects and their awareness for environmental matters. The
independent environmental expert will ensure that GEF's environmental objectives
are met, following the model that was successfully used in the Budapest Bank
Environmental Credit Line.
3.4 PROCUREMENT
The Facility will be available to finance private and public sector projects. Under the
Bank's Procurement Policies and Rules ("PP&R", section 4.4), public sector
recipients of EBRD financing channeled through private banks must apply the Bank's
public sector rules. To ensure compliance with these rules, the services of a
procurement specialist will be financed through the GEF grant.
· For works contracts under EUR 5 million and goods contracts under EUR
200,000, local competitive tendering in accordance with Slovenian national
procedures will be acceptable to the Bank. The procurement specialist will satisfy
himself that the sub-borrower's proposed tendering process and tender
documentation are in accordance with the national procedures.
· For goods contracts above EUR 200,000 and works contracts above EUR 5
million, open tendering procedures are to be applied. A procurement specialist
will review, on an ex-ante and no-objection basis, the tender documents, the
tender evaluation report and the contract. A project will only become eligible for
financing if the specialist confirms compliance with the Bank's PP&R. The sub-
loan amount for this Facility may go up to a maximum of EUR 4.5 million. It is
therefore assumed that mandatory open tendering for work contracts greater than
EUR 5 million is not necessarily an issue.
· Once the loan has been disbursed to the sub-borrower, the procurement specialist
will check that agreed procedures have been followed and that the proceeds of the
loan have been used for the purpose of the loan. This will be conducted on an ex-
post basis.
3.5 MEASURING / MONITORING SUCCESS
The Facility will be monitored at the level of each participating bank as well as on an
aggregate basis. The Bank will monitor each participating bank. Participating banks
would be required to provide semi-annual reports on the sub-loans disbursed under
the Facility to ensure that the funds are allocated in compliance with the requirements
of the Facility, as well as on the bank's financial performance.
To measure the environmental impact and to ensure that the objectives and
requirements of the Facility are met, the environmental expert will monitor each sub-
project individually. Summary reports after completion of each sub-project as well as
a semi-annual aggregate report will be provided to establish the overall results of the
Facility, in particular the reduction in water pollution of each sub-project as well as
the overall quantity. A procurement specialist will review sub-projects submitted
10
from public entities to ensure compliance with public procurement rules and the
EBRD will be monitoring the review process.
The Bank will monitor the Facility as a whole, aggregating information received from
individual monitoring and reporting to GEF on a semi-annual basis. The transition
impact will be measured by reporting on the fraction of loans to SMEs, the number of
water pollution reduction projects that obtained assistance from the TMG/BAS
programme, the number of sub-projects funded through the Facility as well as the
number of sub-projects, which have been successfully completed. The latter has to be
confirmed by the environmental expert. The broadness of fund availability under the
Facility will be measured by reporting on the aggregate market share of all the
participating banks. Information dissemination will be measured by the number of
hits on the website, which will be created to provide information about the Facility.
4.
FINANCIAL / ECONOMIC ANALYSIS
Financial viability for each bank loan will be assessed during the due diligence
process. The economic benefits of the project are expected to be higher than its
financial return because it will generate substantial global and domestic
environmental benefits, which justify the utilisation of grant contributions. Global
benefits include (i) reduction of transboundary water pollution in the DRB, (ii)
accelerating compliance with national standards before the deadlines established in
the legislation, (iii) promoting emission reductions beyond national/EU requirements
and (iv) demonstrating innovative nutrient pollution reduction technologies with
replication potential in the DRB.
Domestic benefits will accrue to Slovenian companies, municipalities and the society
as a whole. Reasons are larger emission reduction as well as the introduction of more
cost-effective ways of reducing water pollution to comply with national and EU
legislation through the adoption of new technologies. Further replication benefits will
be generated by the demonstration of these new technologies, as it will contribute to
raising awareness and capacity of Slovenian companies and municipalities to
undertake environmental investments. Socio-economic benefits are (i) reduced water
treatment costs for municipalities and firms, (ii) reduced costs of compliance with
national/EU environmental standards, (iii) reduced health costs due to cleaner water
and (iv) improved quality of life in neighbouring communities.
Overall, the environmental impact and as a result the economic impact of the Facility
are estimated to be significant. It is, however, impossible to quantify these impacts as
the exact nature of the sub-projects and their contribution to the above benefits are not
known in advance. Economic benefits will further accrue from the demonstration
effect on the financial intermediaries on how to deal with environmental projects.
Local banks will be encouraged to engage in this business in the future, thus
increasing the range of financing available to private and public entities in Slovenia.
11
5.
KEY RISKS AND SENSITIVITY ANALYSIS
5.1 SENSITIVITY ANALYSIS / RISKS
Risks Effect Comments
Credit risk of
Repayment may This risk is mitigated by carefully selecting the PBs,
participating
be jeopardised
some of which already have a business relationship with
banks ("PB")
EBRD. Credit risk will be assessed for each potential
PB.
Risk that PBs
Failure to
EBRD would have the right to cancel the loans to banks
will not
achieve
if they are not disbursed in the drawdown period.
provide loans
environmental
Unutilised amounts will be transferred to those banks
to sub-
and transition
which are disbursing loans the quickest.
borrowers in a impact
timely fashion
The administration fee seems attractive to the banks.
They will obtain these fees only if disbursements are
made to qualifying projects during the availability
period.
Low demand
Non-
With Slovenia's expected entry into the EU in 2004,
for financing
disbursement of pressure to comply with EU standards and state-
funds
enforcement for compliance with legislation has
increased for polluting companies and municipalities.
In preparation of the Facility, a demand study was
carried out which confirmed a demand many times
more than the EUR 45 million available through this
Facility for this type of investments.
Sub-loan
Poor project
The environmental consultant and the associated
quality
quality at entry
technical assistance and training will mitigate the risk of
may result in
not meeting the environmental objectives. The banks
disbursement
will apply their loan approval criteria to ensure the
delays and
creditworthiness of the sub-borrowers and the
failure to meet
soundness of the project from a financial point of view.
the targets of the
Facility
Procurement
Non-compliance Each public sector project submitted for obtaining
with EBRD
funding from the Facility would have to demonstrate
procurement
compliance with EBRD and Slovenian procurement
rules and
rules and regulations. A procurement specialist,
regulations for
financed with GEF grant money, would have to confirm
public sector
compliance before a public project becomes eligible for
projects
a sub-loan from the Facility.
Replicability
Failure to meet
Slovenia was chosen as a pilot country because its EU
objectives of the compatible environmental legislation creates pressure
Facility would
on companies and municipalities to comply with
have negative
environmental requirements thus increasing demand for
impact on
this type of investment financing.
subsequent
Following factors mitigate the risk of non-replicability
replication in
in other DRB countries:
other DRB
(i)A key element of the concept is to channel funding
countries
through the local banks. EBRD has relationships with
financial institutions in all its countries of operation.
12
(ii) The Facility includes a minimum of pre-determined
requirements, which can be easily adapted to different
settings.
(iii) The Facility makes available grant funding which
should facilitate replication in countries with severe
constraints on grant funding for environmental
purposes.
(iv) Environmental compliance is becoming important
for all of the DRB countries through their participation
in the Danube River Protection Convention. In
addition, many of them are in the EU accession process.
(v) The GEF is keen to expand the co-operation with
EBRD and to channel funding for environmental
purposes through the private sector. The GEF has
expressed an interest in replicating this Facility,
provided its implementation is successful.
Market
Provision of
To mitigate this risk, it needs to be ensured that all
distortion
financial
potential sub-borrowers have access to the Facility.
incentives to
This will be achieved by including several participating
sub-borrowers
banks in the Facility. Further, the Facility will be
could distort the advertised broadly throughout the country and
market
beneficiaries will have access to financing on a first
come, first served basis. Concessional financing will
only be available for specific projects meeting the
eligibility criteria, which have to be confirmed by the
environmental expert.
5.2 PAST EXPERIENCE
The following paragraphs focus on the Budapest Credit Line and the EBRD/EU SME
Financing Facility, which have been chosen as examples of past experience because
of their relevance to the proposed Facility. In both cases, the channelling of grant
funds via EBRD through its network of financial intermediaries to a large number of
sub-borrowers has been efficient and effective.
In December of 1996, the EBRD extended a revolving environmental credit line to
Budapest Bank in Hungary, providing funds for on-lending to companies investing in
projects with specific environmental benefits. By blending the funds with interest free
funds from Phare, sub-loans were on-lent at below commercial interest rates. An
independent environmental expert was assigned to prescreen projects, verify the
meeting of eligibility criteria and monitor final completion.
Another example of a grant-supported credit line targeting specific types of projects is
the EBRD/EU SME Finance Facility. Participating banks in EU accession countries
receive a commercial credit line from EBRD, supported by technical assistance and
the granting of a performance fee funded by the EU. This facility has been very
successful and was extended for the third time in September 2002. As of end of 2002,
commitments of EUR 373 million have been granted to 25 banks in 10 countries.
Experiences gathered and lessons learned from the above projects have been taken
into consideration for this new Facility. To ensure broad regional coverage and
mitigate market distortions, several banks will be included in the Facility. In addition,
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extensive marketing campaigns will be carried out to ensure that a large number of
potential sub-borrowers learn about the Facility and have a chance to apply for
financing. Delays or cancelling of the Facility resulting from slow processing of grant
funding by the donor will not apply in this case, as GEF donor funding has already
been approved and no delays in disbursements should occur. For this Facility,
particular attention has been given to set up the required procedures in an efficient
way, keeping the bureaucracy and the time spans associated with sub-project approval
to the necessary minimum. To ensure that funds allocated to banks are not laying
idle, the drawdown period will be short and funds might be reallocated to more
efficient competitors if banks do not manage to disburse them in due time.
To this date, EBRD has received GEF project development funds for the preparation
of three projects. Besides this Facility, these include a municipal energy efficiency
project in Poland and a geothermal power plant in Mutnowsky, Far East Russia.
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ANNEXES
ANNEX 1: EU PRE AND POST ACCESSION ASSISTANCE
Pre Accession:
During the period 2000 2006 financial assistance from the European Communities
to the candidate countries of central and eastern Europe is being provided through
three instruments:
1. The Poland-Hungary Aid for Restructuring the Economy (Phare) programme
(Council regulation 3906/89);
2. The Instrument for Structural Policies for Pre-Accession (ISPA, Council
Regulation 1267/99), and;
3. The Special Accession Programme for Agriculture and Rural Development
(SAPARD, Council Regulation 1268/99)
Phare:
Phare focuses on two main priorities - institution building and acquis-related
investment. Institution building accounts for some 30% of the budget and is defined
as the process of helping the candidate countries to develop the structures, strategies,
human resources and management skills needed to strengthen their economic, social,
regulatory and administrative capacity. Acquis-related investment consists of:
- co-financing of investment in the countries' regulatory framework to strengthen
the regulatory infrastructure needed to ensure compliance with the acquis;
- co-financing of investment in economic and social cohesion through measures
similar to those supported in Member States through the European Regional
Development Fund and the European Social Fund.
In 2001, Slovenia was allocated MEUR 21.3 for national programmes and MEUR 7.0
for cross-border co-operation programmes. In 2002 the total Phare allocation for
Slovenia was MEUR 41.91.
ISPA:
ISPA provides financial support for investment in the areas of environment and
transport in order to speed up compliance with European legislation. For the transport
sector, funding is aimed at the development of railways, roads, waterways and ports
and airport infrastructure. Up to now 50% of the ISPA budget has been spent on
railways, with roads being the second most important sub-sector. In the area of
environmental infrastructure, ISPA concentrates on the investment heavy directives
which concern drinking water, waste water treatment, solid waste management and air
pollution. The minimum size of investment is MEUR 5 although individuals projects
can be smaller where a number are grouped together. The private sector projects
targeted by the Facility would not be eligible for ISPA financing.
1 The Enlargement Process and the three pre-accession instruments: Phare, ISPA, Sapard European
Commission Enlargement Directorate General, Feb 2002
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SAPARD:
SAPARD aims to support efforts to prepare for participation in the Common
Agricultural Policy ("CAP") and the Single Market. The two major objectives of
SAPARD are:
- to help solve the priority and specific problems in agriculture and rural
development;
- to contribute to the implementation of the acquis communitaire concerning CAP
and other agricultural policies.
Support under SAPARD should relate to one or more of fifteen measures including
agricultural production methods designed to protect the environment and maintain the
countryside. Agri-environment schemes proposed by Candidate Countries to date
include the management of nature conservation areas, the development and promotion
of organic farming, the prevention of erosion and pollution, and the maintenance of
farming (particularly extensive grazing) in areas of high natural value. SAPARD
funds amount to MEUR 540 (at 2001 prices) and in 2001 the largest allocation was to
Poland at MEUR 175 and the smallest to Slovenia at MEUR 6.6. SAPARD funds are
to be used for the part financing of proven expenditures incurred by beneficiaries and
in no case is the Community contribution to precede the national component of any
project.
Post Accession:
Following accession, Candidate Countries should become eligible for the same
support as current Member States. After expenditure on CAP, structural operations
are the EU's largest expenditure. The largest portion of resources for structural
operations is allocated to the Structural Funds and a smaller portion to the Cohesion
Funds. During 2000-2006, the European Union will grant its member states
Structural and Cohesion Fund grants totalling 213 billion to undertake projects in a
variety of sectors. Many of these projects will be performed by the private sector, in
partnership with public authorities.
Structural Fund grants are given to national, regional, and local authorities for, among
others, infrastructure and industrial projects in such sectors as telecommunications,
energy, tourism, environment, transport, etc. Structural Funds are non-reimbursable
grants given to projects which are assessed/approved by relevant local and regional
authorities. There are four Structural Funds: the European Regional Development
Fund, the European Social Fund, the European Agricultural Guidance and Guarantee
Fund and the Financial Instrument for Fisheries Guidance. The objectives of the
Structural Funds for the period 2000 2006 are:
- to develop regions lagging behind in development;
- the economic and social transformation of areas in structural difficulty;
- the modernisation of policies and systems of education, training and employment.
The Structural Funds also support four Community initiatives, Interreg, Leader, Equal
and Urban which target on different themes such as the development of rural areas
(Leader).
The Cohesion Funds are designed to support Member States with a per capita GNP
less that 90% of the Community average. They support projects in the fields of
16
environment (50%) and transport (50%) and, currently, cover only four countries:
Spain, Portugal, Ireland, Greece. Most of the money is spent on establishing
infrastructure such as highways and bypasses in the transport sector, and in the
environment sector, on water availability, waste water treatment and solid waste
management.
Discussion:
The EU's Agenda 2000 action programme recognised the difficulties that Candidate
Countries would face in complying with the requirements of the environmental
acquis. Even with the assistance of programmes such as ISPA and SAPARD it is
estimated that only 4% of investment needs would be covered by EU funds2. This
means that the vast majority of funding required for environmental investment would
need to come from the Candidate Countries themselves. As it is, the Candidate
Countries already expend, on average, twice the proportion of their GDP on
environmental protection, in comparison to the amount expended in EU Member
States currently. It is not immediately evident therefore, how they will find the
additional resources required to meet the environmental acquis.
Taking the Urban Wastewater Treatment Directive as an example it is estimated that
the costs to Slovenia of implementing this directive are 914 MEUR for sewage only,
an average of 457 EUR per capita3.
Conclusions:
In terms of the impact of EU funds on the effectiveness of the EBRD/GEF
Environmental Facility the following can be said:
- Phare, ISPA and SAPARD funds have well defined objectives, are provided for
very specific purposes and are accompanied by a series of clear eligibility criteria.
- These funds are generally provided through public sector bodies and only cover a
certain portion of any investment. Other funding is expected from other financing
sources such as EBRD.
- For the period 2004 2006, the funds allocated to Slovenia by the EU for all
environmental purposes amounts to EUR 100 million. Given the needs identified
in the demand study for water pollution reduction projects, there is room for
additional EBRD financing.
2 http://europa.eu.int/comm/environment/agenda2000/enlargement.htm
3 Technical Report on Enlargement J. Jantzen, J. Cofala, B.J. de Haan, Nov. 2000
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Annex 2: Summary of Demand Study and Table of Projects
The Demand Study ("the Study") was initiated in May 2002 as part of the preparatory
work for the EBRD's GEF project submission. It was prepared by the TurnAround
Management Group's Slovenian Business Advisory Service, a grant financed
programme aimed at promoting the development of SMEs through the provision of
practical business advice.
The main purpose of the Study was to estimate the total demand, within the Slovenian
portion of the River Danube Basin, for finance to implement water pollution reduction
projects. The principal drivers of that demand include the need for companies and
municipalities to comply with current and future environmental legislation and the
need for companies to improve their efficiency and reduce costs. The Study covered
three key sectors industry, smaller municipalities and agriculture and covered a
number issues including:
· current legislation and the current status of the implementation of EU
environmental legislation by Slovenia;
· the Slovenian waste water and water use taxation system and future developments;
· water quality status and industrial effluent monitoring;
· other credit and technical assistance available for similar purposes.
Most importantly the Study included the results of a detailed survey of 36 companies
to understand their basic business, their current problems with regard to water
pollution issues and the solutions envisaged including potential financing needs. Most
of the companies surveyed were located in two areas/basins the Lower Sava
(Sevnica, Krsko, Brezice, Jrastnik) and the Middle Sava (Ljubljana and Domzale).
The survey also includes some companies from other areas to get a broader sectoral
spread. From this survey an extrapolation was made to produce an indication of the
national demand for water pollution financing.
The Study estimated that total demand for investments aimed at reduction of water
pollution in the Danube area of Slovenia (covering 81% of the surface) in the
private/industrial sector would be 384 mio. This demand is covering the timeframe
of 2003-2007.
The Study also estimated that, for the public sector Waste Water Treatment
Programme, an additional 593 mio. would be required in the timeframe of 2002-
2010. At least 168 of this sum is to be expected as requirement for additional
funding i.e. potentially from a targeted credit facility such as that proposed by EBRD.
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