Going green or going for growth? No choice, it must be both

By Sir Suma Chakrabarti

Sir Suma Chakrabarti, EBRD President

Sir Suma Chakrabarti, EBRD President

Sir Suma Chakrabarti was elected of President of the European Bank for Reconstruction and Development (EBRD) for a four-year term starting on July 3, 2012.

Sir Suma, born in 1959 in West Bengal, India, has extensive experience in international development economics and policy-making, as well as in designing and implementing wider public service reform.

Most recently he held the position of Permanent Secretary at the British Ministry of Justice and was its most senior civil servant. Prior to this, from 2002, he headed the UK’s Department for International Development where he worked closely with economies undergoing substantial reform in eastern Europe, the former Soviet Union and the Middle East and North Africa.

After studying Politics, Philosophy and Economics at the University of Oxford, Sir Suma took a Masters in Development Economics at the University of Sussex. He also holds honorary doctorates from the Universities of Sussex and East Anglia.

With countries still grappling with contracting economies, disappearing export markets and dwindling inflows of foreign investment, authorities are being asked to make tough calls. In many countries there is an urgent need to deal with unsustainable levels of debt and banking systems have to be rescued from mountains of non-performing assets. Authorities are having to dole out austerity, at the risk of losing the support of those who voted them into power.

But while they are dealing with the immediate fiscal and bank solvency issues, governments also need to plan for the future, to prepare a route towards more robust sustainable economic growth in the medium to longer term. Key to this preparation is a continuation of the reform programmes that so many governments have embraced but whose implementation has been made so much harder in these times of heightened economic tension.

It is precisely during the tough times that the reform agenda has to be pursued. It is indeed a leadership challenge. Only by looking beyond short-term political objectives, confronting vested interests and seeking the longer-term good of the economy can this path to growth, jobs and prosperity be resumed.

At the EBRD, we are convinced that the same holds true for the “Green agenda”. During economic crises, people are quick to complain that they have no time to think about the environment.

This is a short-sighted approach. Firstly, a failure to deal with environmental challenges is a betrayal of our future generations. But a failure to deal with the problems of energy waste also makes no economic sense. An investment in energy efficiency is an investment in reduced costs, increased competitiveness and higher profits.

Raising environmental standards, securing sustainable energy resources and reducing energy waste are integral parts of the overall reform process that leads to economic stability and future prosperity. The opportunity to address these reform issues must be seized now. It will make the recovery all the more robust when it does come.

Economic outlook for SEE

For now, that recovery does not appear to be coming any time soon. The economies of Southeast Europe have been particularly affected by the crisis. As of mid-2012, output growth is negligible at best, or negative in some cases; confidence and investment are low; and vulnerabilities are rising.

The pre-crisis boom years, roughly the period 2000-2008 when annual growth across the region was typically 5.0% or more, now seem but a distant memory. During that time, the “growth model” enjoyed by the region was one based on large inflows of relatively cheap capital and a strong, credit-fuelled consumer boom. Foreign banks in particular saw a major growth opportunity and they competed aggressively for market share. While this model worked for a time, it left the region highly exposed when the global downturn came in 2008. All SEE countries except Albania, recorded a recession in 2009, and the subsequent recovery in late 2010 and 2011 was modest and short-lived.

The latest figures are particularly gloomy. High-frequency indicators from the region, such as those for exports, imports, credit growth, industrial production and retail trade turnover, point to a significant slow-down and weak or falling demand from both domestic and external sources. SEE countries are particularly exposed to weaknesses in the eurozone, their main export market. Some countries are also vulnerable to a fall in remittances, which have been a vital lifeline for many families and small businesses in SEE. There are deep concerns at present about the implications of possible financial sector turmoil in the eurozone and what it might mean for SEE, given that foreign-owned banks account for about 90% of banking assets in the region.

While the scope for fiscal or monetary stimulus is limited, it is the reform agenda that needs to be maintained in order to further improve the business environment and the climate for long-term reliable foreign and private investment.

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Significant progress has been made over the years in improving the quality of the business environment, for example by removing licences and “red tape”, tackling corruption and enforcing competition laws, but these reforms typically take time to achieve lasting effects. Much more needs to be done to reach best international practice in these areas.

Environmental challenges and energy solutions in SEE

It is equally important that the countries of SEE prepare for a safe and sustainable energy future, dealing with the dual challenges of climate change and endemic energy waste.

Southeast Europe is by no means immune to the effects of climate change. For example, changes in precipitation patterns are expected variously to increase the threat of summer droughts but also river flooding in such major waterways as the Danube. Improvements in water supply infrastructure and in water use efficiency in agriculture and industry are major priorities for policy-makers.

At the same time, SEE is a huge consumer of largely imported energy. Energy intensity in the region is well above the EU average, while primary sources of energy are limited in most countries.

Bearing in mind these twin factors there is huge scope to take advantage of the immediate benefits of energy efficiency investments, while seeking more sustainable and less import-dependent sources of energy, even though external energy will still be needed to meet growing energy demands.

Total EBRD Investments

However, the region is increasingly harnessing local renewable energy sources. Hydropower is relatively abundant, with particular potential in the area of smaller river hydro-plants. Coastal and mountainous regions enjoy relatively high-quality wind resources and many countries in the region can look to solar power for water heating and electricity generation.

On the energy efficiency side, more needs to be done to raise awareness of its benefits and to create the incentives to promote it. The investment climate for energy efficiency is in many cases weaker than for renewable energy, partly because energy prices remain subsidised even in the EU member states.

In the western Balkans, energy efficiency improvements are still constrained by persistent market and institutional barriers, which prevent economically viable energy efficiency progressions in particular in the building sector. However, good examples of policy change in this arena have come for instance in Romania and Bulgaria, where energy service companies have been successfully developed. Slovenia is pioneering measures to rationalise energy demand aimed at harnessing energy savings.

The EBRD and sustainable energy in SEE

The EBRD is ready, willing and able to work with countries across Southeast Europe as part of its overall mandate to help the whole EBRD region secure sustainable energy supplies, and finance the efficient use of energy that will cut demand and imports, reduce pollution and mitigate the effects of climate change.

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The focal point for these operations is the Sustainable Energy Initiative (SEI), launched in May 2006 to address the twin challenges of energy efficiency and climate change.
Since 2006, the EBRD has invested 9.7 billion euro under the SEI through 532 projects in 31 countries, with a total project value of 55 billion euro. The total reduction in carbon emissions achieved by these projects is estimated at approximately 50 million tonnes per year.

In SEE alone, the EBRD has invested more than 2.2 billion euro in sustainable energy through more than 177 individual projects in various sectors ranging from municipal and environmental infrastructure and natural resources to agribusiness and financial institutions. In 2011, about one-third of the EBRD’s total investment volume in Southeast Europe was related to projects with sustainable energy components.

Some of the recent major projects include a 150 million euro financing to support the modernisation of a Croatian oil refinery, INA. The new equipment purchased using EBRD funds will enable the company to start producing Euro V quality products as well as reducing CO2 emissions by 1,064 kilotonnes annually.

Likewise, the EBRD is active in supporting small companies in increasing energy efficiency via EBRD-financed credit lines for small businesses. One example is a 155 million euro EBRD credit line framework available to Bulgarian banks for on-lending to the local SMEs to finance eligible investments in energy-saving technologies, as well as small-scale renewable energy projects such as solar thermal and heat pumps. The project is expected to save around 868,000 MWh of electricity as well as 553,000 tonnes of CO2 emissions annually.

In June 2012 the EBRD provided 20.4 million euro for the acquisition of new energy-efficient trams to the Romanian city of Arad. The EBRD financing will support the city’s wider objective of restructuring the public transport system and improving its efficiency, as well as reducing traffic congestion and air pollution in Arad.

As part of its efforts, the EBRD lent 65 million euro to Elektrarni Makedonija, an FYR Macedonian company responsible for power generation, to finance the construction of the 70 MW Boskov Most hydropower plant, with the aim of contributing to the country’s energy security, providing new clean renewable generation capacity and reducing the country’s dependence on imports and ageing lignite-fired plants.

Long-term prospects

At the EBRD we are confident that the right policies are being put in place across Southeast Europe, both to deal with the immediate implications of the crisis and to prepare for longer-term economic stability. This includes meeting the challenges of the climate and energy agenda.

When the recovery finally comes, as no doubt it will, Southeast Europe will be in a very strong position. By taking the right steps now, the countries of this region again open up their markets to an investment community that wishes to work in harmony towards a more prosperous future.