EBRD/GEF PROJECT CONCEPT
Project Name: Danube Pollution Reduction Programme - Financing of Pollution Reduction
Projects by Local Financial Intermediaries.
Countries in which project is being implemented: Countries of the Danube River Basin, focusing
primarily on Bosnia and Herzegovina, Bulgaria, Hungary, Romania, and Slovenia
GEF Focal Areas and/or Cross-Cutting Issues: International Waters
Operational Programme: OP8 (Waterbody-based)
Project Linkage to national and regional priorities, action plans and programmes;
The Danube River Basin is the heartland of south-central and south-eastern Europe. The river
flows for a distance of 2,857km and drains an area of 817,000km2. Tributaries flowing into the
Danube include the Rivers Sava, Drava, Tisza, Vah, Iskar and Siret. About eighty million people
live in the basin, which includes Hungary, Romania, the Slovak Republic, Slovenia, Bosnia and
Herzegovina, Croatia, about a third of both Bulgaria and the Czech Republic, significant areas of
Moldova, and small parts of Ukraine.
Significant problems have arisen because of discharges of municipal and industrial waste waters
into the tributaries of the Danube and into the Danube itself. Few of the major cities in the Danube
basin have adequate wastewater treatment plants and agriculture, rural housing, and solid waste and
sludge disposal continue to pollute. Although the flow into the Danube is some three times the
flow into the Rhine and the concentrations of pollutants in the main stream are generally similar to
or less than those in the Rhine, the total loads of nutrients, phosphates, heavy metals and oil
reaching the Black Sea exceeds that being discharged into the North Sea by all the European rivers
together.
Where the Danube meets the Black Sea, the river has formed the Danube Delta, an extensive area
including lakes, reedbeds, marshes, steppes, dunes, shingle bars, costs, lagoons, saltmarshes and
climax forests. As a centre of wetland biodiversity, the Danube Delta ranks among the top sites in
Europe. Its waters harbour over 60 species of fish, including several species of sturgeon, several
globally threatened bird species including pygmy cormorants, red-breasted geese and two species of
pelican, plus important populations of otter and mink. The delta is economically vital to this region
providing a major source of natural resources, principally fish, and an important source of tourist
income, with considerable potential for the development of eco-tourism projects.
Concern regarding the quality of waters within the Danube and its tributaries, and the subsequent
impact of pollution on human and animal life living in and around the rivers, the Danube Delta and
the Black Sea, has stimulated a number of programmes to reduce pollution loads. Amongst these is
the UNDP/GEF Danube River Pollution Reduction Programme. This programme aims to reduce
pollution loads in surface and groundwaters in the Danube River Basin and to reduce the nutrient
loads to the Black Sea. As part of this programme, countries within the Danube River Basin were
asked to prepare National Reviews which were designed to produce basic data on the state of water
pollution within the Danube River Basin, and identify and evaluate hot spots of pollution within the
municipal, agricultural and industrial sectors. The National Reviews also led to the preparation of a
portfolio of investment projects for each country, to improve water quality. A selection of projects
from the individual portfolios of each country have been combined into the Danube Partnership
Programme (DPP).
Through on-going discussion between the GEF and the European Bank for Reconstruction and
Development (EBRD), the Bank has been asked to consider how it might participate in the
implementation of projects supporting the aims of the Danube River Pollution Reduction
Programme, focusing, in particular, on nutrients reduction.
Project Rationale and Objectives:
Within the framework of the Pollution Reduction Programme, between 420 and 450 high, medium
and low priority projects related to 51 significant impact areas were defined. Of these, 73 project
concepts have been collated to form the DPP, which is designed to facilitate the implementation of
the Pollution Reduction Programme and attract financial and technical assistance from various
financial institutions and donor organisations.
Projects included in the DPP are categorised into four groups: municipal wastewater treatment,
wetland restoration, industrial pollution reduction, and agriculture. The projects are developed
within both public bodies, such as municipalities, and private companies. Each project description
includes information on the project justification, including its transboundary effects, the project
activities and components, the environmental effects and required inputs. The required inputs
include information on the financial viability, and the incremental costs of the project. Of the
investment costs estimated for each project, a certain proportion would be provided by the GEP (the
incremental costs), and the rest could be financed through a number of other channels such as the
company's own resources, government grants, or local / international loans.
GEF and the DPP are seeking financial institutions, and in particular International Financial
Institutions such as the IBRD and EBRD, to provide the loan portion of projects listed in the DPP.
Given the size of these projects (between US$ 300,000 and US$ 5,000,000) and the fact that any
loan would only represent a proportion of the total investment needs, the EBRD would not be able
to directly finance the loan portion of any of these projects.1 Therefore, in order to reach small and
medium sized enterprises, the Bank provides finance to local banks (financial intermediaries or FIs)
who then on-lend smaller amounts of money to local businesses. It is through these FIs that EBRD
proposes to participate in the financing of DPP projects. It should be noted that this project
proposal will only include projects in the industrial and agriculture groups, because they are most
suitable for commercial cofinancing by FIs, while offering significant opportunities for the
reduction of the nutrients load in the Danube.
Project proposal:
It is important to remember that, from a banking perspective, these projects would require special
treatment because of the grant aspects of GEF’s involvement. EBRD’s mandate requires it to
promote market orientated behaviour and the provision of grant funding is considered as a
distortion of market economics. GEF’s funds would need to be kept largely separate from the loan
portion of any project, which would need to fully retain its commercial characteristics.
1
The guideline minimum direct involvement of the EBRD is Euro 5 million (around US$ 5,350,000 at current rates)
and in practice the average direct involvement is around ECU 22 million (US$ 23,540,000 ).
There are two possible routes that Bank could follow:
Option (1)
The Bank creates a new central credit facility for project funding which can distribute funds on a
regional basis. Project appraisal and structuring would be undertaken by a unit located either within
the Bank or in the region. This unit would be staffed by non-EBRD experts, funded through GEF
money, who would prepare the grant component for submission to GEF as well as ensuring that the
projects meet the relevant criteria of the Bank and the particular FI through whom the project will
be passed. In this case, the FI would simply act as conduit through which funding is channelled.
For each country, EBRD would identify a partner FI with whom the Bank already has an existing
relationship. In order to ensure that some ownership is taken by the FI, it becomes responsible for
monitoring the progress of the project and collecting repayments of the loan. The FI would take a
fee for providing this service.
Advantages: The Bank can retain more direct control of project structuring and approval to ensure
that the projects meet sound banking criteria and also the environmental criteria of the GEF. The
project approval structure would be simplified from an FI perspective as the amount of work they
have to do is greatly reduced.
Disadvantages: The costs to the Bank in terms of administrative time to set up the facility, select
consultants etc., is far greater. The Bank would be directly exposed to the risks of the project
because it is lending its own funds.
Option ( 2)
The Partner FIs take full responsibility for project appraisal and implementation, using a
standardised loan format to ensure that the relevant criteria are met. Funds for the project are
provided by the FIs, who are then fully responsible for project monitoring and collection of
repayments. As the Bank would be working with existing FIs, there would be no need to establish a
new separate EBRD credit facility.
Advantages: The costs and responsibilities of project preparation are borne by the FIs. The FIs take
more ownership of the projects and are therefore more motivated to see that the projects are
successful.
Disadvantages: The costs to the borrower might be greater since the project preparation costs have
been borne by the FI and may well be passed on to the borrower. Since the FI is putting its own
funds at risk, there is a greater likelihood that projects will be rejected as too risky. It is unlikely that
FIs will have the capacity to prepare the grant components for GEF submission.
In order for EBRD's FIs to participate in these projects, a much clearer idea of the borrowing
requirements for the DPP projects is required. As it stands, the total estimated borrowing
requirements of the industry and agriculture groups within the DPP are US$ 11,119,93 from
international sources and all, or a portion of, US$ 18,163,352 from domestic sources (see table
below taken from Danube Partnership Programme, National Projects Investment Portfolio, 6 July
1999.)
Country and Sector
Bosnia and Herzegovina
Industry
Agriculture
Bulgaria
Industry
Agriculture
Croatia
Industry
Agriculture
Czech Republic
Industry
Agriculture
Hungary
Industry
Agriculture
Romania
Industry
Agriculture
Slovakia
Industry
Agriculture
Slovenia
Industry
Agriculture
Ukraine
Industry
Agriculture
Total Investments
US$
Intl. Borrowing
Needs
US$
Domestic
Contribution*
US$
0
8,000,000
0
1,600,000
0
0
25,646,616,
3,800,000
5,669,933
2,100,000
4,802,222
0
0
2,300,000
0
0
0
0
0
3,200,000
0
0
0
1,280,000
0
11,673,900
0
0
0
2,886,300
11,530,000
12,877,000
0
0
6,000,000
0
8,260,000
0
1,400,000
0
1,300,000
0
0
5,273,080
0
350,000
0
1,895,000
0
500,000
0
0
0
0
Total
93,060,596
11,119,933
18,163,522
* Figures have been included either where a specific number of domestic loans is shown or where a
generic figure, covering all three categories under Baseline Domestic Contribution, is included.
As it stands, the borrowing needs of projects included in the Danube Partnership Programme are
small and geographically disparate. For the Bank to contemplate pursuing Option (1) there would
need to be sufficient projects and lending needs to justify the administrative effort of creating and
managing a facility. For the FIs likewise to pursue Option (2) there needs to be sufficient projects
within its country. Given that the Bank’s direct involvement on a project-by-project is not possible,
it is suggested that the international borrowing needs would be met by the Bank’s partner FIs, in
addition to any domestic borrowing needs. This would then give an indicative total borrowing need
of US$ 29,283,455. However, the domestic contribution as currently presented in the DPP project
concepts includes three elements: beneficiary budget, national loans, and national grants. It is not
clear exactly what proportion of this is loans and this information is vital in gaining an
understanding of the volume of business actually involved in supporting the Danube Partnership
Programme.
Added to this, the projects need more due diligence work to ensure that, from a credit perspective,
they are acceptable. There is no information on the long-term viability of the project companies,
nor information necessary to make funding decisions. This would include an analysis of the
companies financial statements, capacity to support the proposed investments, and preparation of a
business plan. Finally, it is our understanding that further work is required on the calculation of the
project component (if any) which would be eligible for GEF funding (incremental cost) and the
preparation of appropriate funding applications.
In the light of the above, the following is proposed:
A GEF project preparation grant in the order of Euro 318,890 to identify and prepare 50 bankable
projects (10 per country) which will contribute to the reduction of the pollution load in the Danube
river Basin, with a particular emphasis on nutrients reduction, and which require commercial
borrowing for at least a part of the total project cost. Additional project selection criteria are
 endorsement by the host country
 commitment of client company to implement the project
 demonstration effect / replicability
 sustainability, particularly for those project with a large grant component
Primary target countries are Bosnia and Herzegovina, Bulgaria, Hungary, Romania, and Slovenia.
In identifying suitable projects, consultants will use to the maximum existing information and
preparatory work, in particular the Project Concepts included in the DPP, and the Project Files
prepared as part of the National Reviews under the Danube Pollution Reduction Programme. Given
the limited demand for credit currently identified in these project concepts/files, a better
understanding of the actual needs of the companies concerned is required. In addition, consultants
may need to screen additional projects not included in the above materials.
For each project a financial analysis of the Company is required to understand whether or not the
Company is able to accept the additional lending burden required to implement these projects. This
information would be required by the partner FIs anyway, and be preparing this at this stage, it is
more likely that the FIs would accept the projects. Project preparation will also involve determining
the incremental cost element of the project and other GEF eligibility criteria.
For each project, consultants will prepare a detailed business plan suitable for submission to FIs as
well as to GEF and other co-financing institutions where relevant.
Key skills require of consultants will include credit analysis/project financing, environmental
expertise in the relevant sectors, experience in the region, and familiarity with GEF. Consultants
would be required to involve local experts as appropriate in order to maximise skills transfer and
capacity to prepare similar projects in the future.
Next Step: EBRD/GEF Project Implementation
This paper is a concept paper and if accepted by the GEF secretariat as eligible, then PDF-B funds
will be required to develop a full project proposal. A formal request will be submitted for such
funds. Based on the outcome of the project preparation work, the Bank would decide whether
Option (1) or Option (2) would be used for project implementation. If the Bank chooses Option (1),
this would require the creation of a central Project Implementation Unit. This would most likely
need a team or maybe two specialists to manage the relationship with partner FIs and GEF. In both
options, some GEF funding would be needed for implementation support. In addition, GEF would
be requested to provide the incremental investment costs identified for each project during the
project preparation phase.
Breakdown of Costs (in Euro)
Direct Expenses
1. Fees
Day Rate
Senior Environmental
Consultant
Credit Specialist
Administrator
2. Per Diem
Allowance2
Bosnia & Herzegovina
Bulgaria
Hungary
Romania
Slovenia
Number of Days
Total
750
135
101,250
1000
350
135
20
135,000
7,000
Per Diem Rate
210
140
126
165
132
Number of Days
Total
50
50
50
50
50
10,500
7,000
6,300
8,250
6,600
Reimbursable Expenses
3. Air Travel
4. Local Travel
Cost
Total
500
Number of Trips
10
Total
40
Number of Trips
50
Cost
5,000
2,000
5. Miscellaneous
Report production
Total
6. Contingencies
10% of sub-total
Total
Total Maximum Expenses
2
Based on per diem rates for EU-funded contracts, 1999.
1,000
28,990
318,890