BERD

TABLE OF CONTENTS

Introduction

Priorities and ratings

2.1. Operational priorities

2.2. Transition impact rating

2.3. Overall performance rating

3. Sub-projects approved by BERD

3.1. Environmental summary for sub-project Oradea

3.2. Upgrade for waste-water treatment in Bacau, Romania

3.3 Environmental summary for sub-project Sibiu

4. Conclusions

5. References

1. INTRODUCTION

As the largest institutional investor in Romania, the EBRD invests in both the private and public sectors in areas such as power, transport, municipal infrastructure and financial institutions. Importantly, the Bank is sup 414e41e porting Romania’s efforts to decrease the intensity of its carbon fuel consumption and is launching its first ever credit facility to finance energy efficiency projects by private industrial companies in Romania.

The EBRD’s latest strategy for Romania was approved in April 2008. The main goal of the strategy is to help Romania meet its post accession challenges. The strategy focuses on the following key priorities:

The Private Enterprise Sector – the Bank will provide support to the local private sector, with a special focus on competitiveness and expansion throughout Romania and cross-border. The Bank will pay particular attention to the development of businesses in less advanced regions of Romania in order to promote regional integration. The single EU market and competition from Asia are challenges to the Romanian private sector which the Bank will help address through finance and expertise. Investment requirements will be addressed in a range of areas including services, manufacturing, technology and skills training. Funding requirements will be considered in close collaboration with local banks and private equity funds. The Bank will diversify its range of financing products to include more high-risk instruments (such as equity, quasi equity, and structured debt) to support the restructuring, consolidation and expansion of local companies on the Romanian market and to attract further FDI. The Bank will enhance its efforts to lend in local currency to those borrowers which generate local currency revenue streams. Local currency loans are critical to mitigate potential foreign exchange exposure which may arise for borrowers whose revenues are denominated in RON but which do not have matching RON liabilities. Financial tools, such as dedicated credit lines utilizing EU post accession funds, will be tailored to help local businesses.

The Energy Sector – The Bank will continue to invest with both the public and private sectors in energy generation, transmission and distribution, including policy dialogue to promote appropriate regulatory and institutional reform in line with the EU Directives and the Government’s recently approved energy strategy. In addition there is a particular need to invest in the upgrade and rehabilitation of electricity assets, especially power stations. Energy efficiency and renewable energy projects will be promoted as part of the Bank’s Sustainable Energy Initiative. The Bank will work to help address Romania’s high energy intensity challenge (which is negatively affecting the economy’s competitiveness) by promoting energy efficiency projects, for municipalities, industries and households.

Infrastructure – The Bank plans to assist Romania improve its infrastructure, including the transport sector, to ensure enhanced regional cooperation, improved trade and the utilization of Single Market benefits. This includes improving the administrative capacity for structuring PPPs and supporting private sector capital in key transport infrastructure projects that will enhance economic development. In addition, the Bank will continue its activities in the municipal sector throughout the country, especially in view of the opportunities arising from the EU post-accession structural and cohesion funds. This will include a focus on the smaller municipalities. The Bank will continue to pursue lending on a commercial basis directly to regional water and waste water companies to upgrade and expand their assets and to municipalities for urban transport and roads, energy efficiency and solid waste transactions.

During the strategy period the Bank will continue to work very closely with the government, the EU and the EIB (including through the joint JASPERS initiative) on how to facilitate and properly use Structural and Cohesion Funds as part of the EU Agenda. In accordance with this Strategy, the Bank will continue to ensure that all EBRD operations in Romania meet sound banking principles have transition impact, are additional, comply with the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans to also support the country to meet its EU environmental acquis objectives.

The EBRD’s evaluation policy requires at least 60% of completed operations to be evaluated. Projects are assessed usually one to two years after full disbursement and the findings are distributed to EBRD bankers, management and the Board of Directors, as well as being posted on the Bank’s web site. To date, around 72% of all Bank projects that are ready for evaluation have been independently evaluated by EvD.
Bank projects are assessed against a number of factors, including the EBRD’s mandate, sound banking principles and effectiveness of project implementation. These are illustrated in the figure below. The fundamental objective of all EBRD investments is to foster the transition from centrally planned to market economies in its countries of operations.

Economic progress

The Romanian economy grew by 7.9 per cent in 2006 and 6 per cent in 2007. The main driver of growth has been domestic demand, with strong wage and credit growth helping to fuel a consumption boom, whilst at the same time investment has grown rapidly. Signs of overheating, however, are apparent. Inflation rose during 2007 to end the year at an annual rate above 6 per cent, fiscal pressures have been increased by major spending increases on public sector wages and benefits, and the current account deficit has expanded to around 14 per cent of GDP. These trends have increased the risks facing the economy and call for a determined policy response in the short-term and an enhanced focus on corporate and bank governance to mitigate these macroeconomic vulnerabilities.

Progress over the transition period

Romania has made significant progress over the transition period towards the standards of advanced market economies. In many respects, these standards have been fully achieved; for example, the degree of liberalisation in price setting, trade and foreign exchange is fully comparable to other EU countries. However, the transition in Romania is not yet complete, and the country continues to face some post-accession transition challenges. Mostly, these challenges are associated with deepening and sustaining market forces, for example through the promotion of better standards of corporate governance, the enforcement of competition rules, the further expansion of financial intermediation (especially in the non-banking sector), the commercialisation of infrastructure services and the development of the local capital market infrastructure. These objectives are difficult to achieve, but they will be necessary to ensure long-term prosperity.

Business environment

The business environment in Romania has improved since the last strategy was approved, but competition from the EU’s single market has highlighted the urgent need to restructure many companies. Better governance standards and the enforcement of regulations are needed to support this restructuring. As noted by the European Commission, judicial reform and the fight against corruption are key challenges facing the country and, while progress has been made in the past year in these areas, efforts must be stepped up in order for Romania to remain an attractive destination for investment.

2. Priorities and ratings

2.1. Operational priorities

The Bank is well placed to assist Romania in meeting the remaining transition challenges effectively. The Bank’s cumulative commitments to Romania have now reached EUR 3.54 billion and the Bank has signed 248 transactions (as at the end December 2007). In addition the Bank has mobilised further funding of EUR 6.5 billion or over 10 billion of total funding. The Bank has identified a number of key areas where it can still have a strong transition impact. Accordingly, the Bank will focus on the following priorities over the forthcoming strategy period.

2.2. Transition impact rating

When assessing a project's impact on the transition process, EvD looks at its wider influence on the sector and on the economy as a whole. For example, EvD evaluates whether the project promotes privatization, develops or improves standards of business conduct, encourages greater competition or supports the expansion of the market.

Transition impact is given a high weighting when determining the project’s overall success. Of the 574 projects evaluated by EvD between 1996 and 2007, 55% have achieved a “good” or “excellent” transition impact rating while a further 24% were assessed as “satisfactory” as detailed in the table below.

2.3. Overall performance rating

Environmental performance is another key area evaluated by EvD. The Bank’s founding agreement states that through its activities, the Bank must promote environmentally sound and sustainable development. EvD works closely with the Bank’s Environment Department to assess the impact of EBRD projects on the environment.

Other factors evaluated include the project’s financial performance and the fulfillment of its objectives. EvD also assesses the Bank’s implementation of the project: its investment performance, handling of the project and its ability to complement rather than “crowd out” private sources of finance (additionality).

Of the 574 projects evaluated between 1996 and 2005, 58% achieved a “successful” or “highly successful” rating overall as detailed in the table below.

The project is designed to provide co-financing to EU-ISPA funded investments in the water, waste-water and solid waste management sectors, in several municipalities to be identified during the next phase of project development. The project addresses investments in water supply, waste-water and solid waste management facilities to comply with EU-accession requirements on environmental standards.

Subprojects:

• MELF Constanta
• MELF Iasi
• MELF Arad
• MELF Brasov
• MELF Oradea
• MELF Targu Mures
• MELF Sibiu
• MELF Timisoara
• MELF Bacau

Development of sub-sovereign financing instruments. The facility would continue the process started in the previous EBRD programmes in the sector for the institutional development of the municipal utilities.

Water and waste-water utilities and solid waste management companies in Romania benefiting from EU-ISPA (Instrument for Structural Policies for Pre-Accession Facility) grant financing available from 2000 to 2006.

The proposed facility is designed as a framework to provide co-financing to EU-ISPA grant funds for selected municipal utilities and/or municipalities. The total amount of the facility is €130 million.

It is estimated that the individual sub-projects included in the framework will receive 50-75% grant funding from EU-ISPA and EBRD co-financing will range between 25-50% from the total cost of the sub-projects. New investment through the Municipal Environmental Loan Facility in the water and waste-water sectors in various municipalities in Romania, which started with the Municipal Utilities Development Programme I (MUDP I) and continued with MUDP II, would further significantly contribute to improving the quality and reliability of the drinking water supply. It would also reduce public health hazards and pollution of surface and ground-water sources by improving effluent quality and municipal solid waste management.

The project offers the opportunity to introduce water and waste-water management systems, which are resource efficient and provide high quality of drinking water and treated effluent. In addition, a municipal solid waste management component, once fully implemented, it would reduce hazards to public health and add to full protection of water resources in selected municipalities.

Individual sub-projects under the Municipal Environmental Loan Facility may involve environmental issues relating to building of new and/or upgrading of existing water, waste-water and municipal solid waste management facilities. Most of the impacts will be of short duration and will be minimised through incorporation of good practice, including forewarning and signing of works, restriction of working hours, development of traffic management schemes offering alternative routes to traffic and pedestrians, etc.

3. Sub-projects approved by BERD

3.1. Environmental summary for sub-project Oradea

EBRD is considering financing the water and wastewater utility in Oradea, APA CANAL, which will be guaranteed by the City of Oradea to complement grant financing from EU-ISPA under MELF. The approved ISPA grant funding to APA CANAL is €16.7 million. The proceeds of the proposed loan will be used to finance the rehabilitation of the wastewater and sludge treatment plants, while the ISPA grant will be used to co-finance rehabilitation of the wastewater and sludge treatment plant, and refurbishment and extension of the sewer network, pumping stations, technical assistance in institutional strengthening to develop tender documents, procurement and site supervision.

This project presents significant environmental opportunities regarding improving the quality of effluent and sludge management thus reducing the threat to public health and pollution of water resources. The environmental investigations were carried out within the framework of the EU-ISPA facility.

The project will enable Romania to comply with this EU Directive (EU Council Directive 91/271/EEC of 21 May 1991 concerning Urban Wastewater Treatment) and to contribute to the fulfilment of the Romanian obligations under:

Szeged Agreement concerning the protection of the River Tisza and its tributaries against pollution, 1986;

Helsinki Convention concerning the protection and use of cross-border water courses and international lakes, 1992;

Sofia Co-operation Agreement concerning the protection of River Danube, 1994;

Bucharest Convention on Black Sea Strategic Action Plan, 1996.

Based on the findings of the Environmental Impact Assessment, environmental impacts of this project are assessed to be temporary and will be mitigated with the application of good management practices. Once the project is completed and operational, it will improve effluent and sludge treatment of the City of Oradea, and it will enable Romania to comply with the relevant EU Directives.

3.2. Upgrade for waste-water treatment in Bacau, Romania

€13 million loan to benefit more than 190,000 residents

The EBRD is lending Regia Autonoma de Gospodarire Comunala Bacau (RAGC Bacau), the water utility company of the City of Bacau, in eastern Romania, €13 million to finance rehabilitation works for the city’s waste-water treatment facilities.

The loan, guaranteed by the municipality of Bacau, complements a €39 million grant from the European Union’s ISPA programme.

The loan is being provided under the Municipal Environmental Loan Facility (MELF), set up in 2000 to provide co-financing with the ISPA programme for wastewater-related projects in Romania. Since then the EBRD has lent more than €80 million to nine transactions, mobilising ISPA grants of around €280 million. The Government of the Netherlands provided €2.2 million in technical cooperation funds to help prepare and implement the projects. In this transaction, EBRD has syndicated €6 million to Bank Austria Creditanstalt, making this the third project in which the two banks have cooperated in Romanian municipal infrastructure.

Dana Craciunescu, EBRD principal banker, said the project reflects the Bank’s policy to lend to commercialised utilities in Romania, which have the ability to generate sufficient cash flow to service debt. Those service utilities and local governments that have implemented tariff reform and commercialisation are now in a position to obtain capital directly, Ms Craciunescu added.

Aleksander Majewski, Project Manager, Corporate & Project Finance CEE of Bank Austria Creditanstalt, said that the transaction was yet another example of the excellent cooperation between the EBRD and Bank Austria Creditanstalt. It shows that an international commercial bank is able to provide loan financing to well structured projects at the municipal level in Romania. Bank Austria Creditanstalt has the largest network in Central and Eastern Europe, with 1,300 branch offices in 11 countries employing 28,000.

The EBRD is the largest investor in Romania, having invested €2.5 billion in nearly 120 projects, including more than €300 million in the municipal and environmental infrastructure sector.

3.3 Environmental summary for sub-project Sibiu

The loan, guaranteed by the municipality of Sibiu, is being made alongside a €25.6 million grant from the European Union’s ISPA programme. The combined financing will help support the extension and rehabilitation of the sewer network, rehabilitation of the drinking-water treatment plant, and metering and monitoring of the water-distribution network.

Thomas Maier, Director of the Municipal and Environmental Infrastructure team at the EBRD, said the project is very much in line with the Bank’s strategy to support local utilities without sovereign guarantees.

The loan is a strong signal of the EBRD’s growing confidence in the strength of some of Romania's local authorities, and the Bank will increase its support to municipalities across the country, including in areas such as district heating and public transport, Mr Maier added.

The loan is being provided under the Municipal Environmental Loan Facility (MELF), set up in 2000 to provide co-financing with the ISPA programme for wastewater-related projects in Romania.

More than €80 million of EBRD loans have been extended in concert with ISPA grants, which help improve living standards and prevent environmental pollution through compliance with EU environmental standards. The Government of the Netherlands also provided €2.2 million in technical cooperation funds to help prepare the overall facility and will provide a further €0.8 million to support implementation of the MELF projects.

The EBRD has syndicated €5 million of the loan to Bank Austria Creditanstalt, which for the second time participates in an EBRD loan under the MELF framework in Romania.

Klaus Johannis, Mayor of Sibiu, said the project is the result of excellent cooperation between the municipality and the EBRD and marks the first step of a long-term relationship for the benefit of the population of Sibiu.

The loan is the EBRD’s seventh to Romanian municipalities under the MELF programme and the eighth issued to municipalities without a sovereign guarantee. The benefits of reforming municipal finance in Romania are beginning to show. The EBRD has invested €2 billion in Romania, including more than €290 million in the municipal and environmental infrastructure sector.