assistance, trade, and investment programs 7

Assistance,Trade,

andInvestment

Programs 7

The countries of the former East Bloc are in the midst of amajor energy and environmental transition and couldbenefit immensely from the knowledge, technologies,and services that the United States and other advanced in-

dustrial countries can provide. However, there are significant ob-stacles to the rapid rehabilitation and development of the energysupply sector. OTA’s previous report reviewed the obstacles toimproving energy efficiency in the region and U.S. programs topromote more efficient use of energy resources. ] This chapterwill address similar issues about technologies affecting energysupply?

The first section of this chapter reviews the barriers to energysector modernization and market reform in the former East Bloc en-ergy sector and briefly describes the U.S. and multilateral programsdesigned to address them. The next section offers an evaluation ofU.S. bilateral programs and of multilateral programs addressingenergy and the environment in the former East Bloc. The final sec-tion presents a survey of bilateral and multilateral programs.

BARRIERS TO ENERGY SECTOR DEVELOPMENTA broad range of institutional, economic, and technical barriersare impeding market reform and technology transfer to the formerEast Bloc energy sector. These barriers are listed in table 7-1.

1 u-s, Congress, Off_lce of TechntJl(~gy Assessment, Energy Efficiency Techno/ogles

@ Cen/ru/and Eastern Europe, OTA-E-562 (Washington, DC: U.S. Government Print-ing Office, May 1993).

Zp]ease note that this chapter will address programs in all areas except nuclear Wwer.That subject is analyzed inch. 4.

Gum Department Store, Moscow.

I 149

150 I Fueling Reform: Energy Technologies for the Former East Bloc

Institutional barriersLack of comprehensive legal frameworkMultipliclty of governmental authorities

Weak enforcement of regulatory standardsLack of market informationLack of market and r’management trainingAmbivalence about foreign investmentBilateral trade restrictions (in West and East)

Economic barriersLack of domestic capitalHigh levels of political and financial riskinconsistent and punitive tax regimesGovernment energy-price subsidiesLow emissions finesLack of feasibility financing for U.S. small business

Technical barriersInadequate physical infrastructureLack of trained personnel (in East and West)Differences in technical standards

—SOURCE U S Congress, Off Ice of Technology Assessment, 1994

| Institutional BarriersThe policy and institutional climate remains themajor inhibitor to technology adoption and diffu-sion in many countries of the region. The most se-rious institutional barrier to market reform andmodernization is the lack of a comprehensive le-gal and regulatory framework to govern energysector development, to define the rights and re-sponsibilities of joint ventures, and to prevent re-consideration of completed contracts. In additionto this basic framework, most countries in the re-gion lack a well elaborated system of intellectualproperty rights. Since recipient countries often donot have adequate patent protection, U.S. industryhas been reluctant to transfer proprietary technol-ogies. An absence of a clear system of title andownership over land also inhibits energy explora-tion and production. The multiplicity of govern-mental authorities, each of whom has a veto overthe decision of other parties, has further compli-cated the development of joint ventures.

Environmental regulations have been a majorfactor in promoting energy facility modernizationin the west, but that has not been true in the formerEast Bloc. Many countries, particularly in the for-mer Soviet Union (FSU), lack regulations to en-sure environmental quality (despite economiccosts). But even in Central Europe, where there isa highly developed regulatory framework for theenvironment, enforcement is extremely weak.

Another important institutional impediment toenergy-sector development is the lack of a system-atic means of disseminating information to poten-tial users about the benefits and costs of improvedtechnologies, as well as how to obtain and usethem. Inadequate information for U.S. producersabout export markets and a lack of contacts in for-eign markets also discourages more aggressiveexport activity. Even when market information isavailable, its high cost puts it out of reach.

Finally, unfamiliarity with basic Western busi-ness practices and concepts such as profit anddepreciation greatly complicates business negoti-ations. A widespread lack of training in free mar-ket economics and a lack of knowledge about therates of return needed to attract investment createunrealistic expectations among enterprise manag-ers. Weak management skills and little experiencein project evaluation or least-cost energy planningalso impede technology transfer.

As noted in chapter 6, the countries of CentralEurope have made a great deal more progress ad-dressing the above issues than have the FSUstates. One of the reasons for institutional inertiain the FSU, especially in Russia, is a deep ambiva-lence toward foreign investment and ownership.Continuing barriers to trade in both donor and re-cipient countries also reduce the incentive forinstitutional reform in both Central Europe andthe FSU.

| Economic BarriersThe second set of barriers to diffusion of energytechnology is economic in nature. A severe lack ofdomestic capital and foreign currency constrainsthe ability of former East Bloc states and enter-prises to purchase improved energy and environ-

Chapter 7 Assistance, Trade, and Investment Programs | 151

mental equipment. These constraints may besomewhat less severe for oil and gas because theyare highly exportable commodities. However,capital constraints are 1ikely to be acute for renew-able, coal, electricity y, and environmentaltechnology. But even in the oil and gas sector, ad-vanced Western technology is typically more ex-pensive than domestic technology, even when theaverage life of equipment is taken into account.

Continuing high levels of political and eco-nomic instability in former East Bloc countriestranslate into high levels of economic and foreigncurrency risk, even in Central Europe. Commer-cial banks remain reluctant to loan on a conven-tional basis.

Government policy—in both East and athome—also contributes to economic impedi-ments to technology transfer in the former EastBloc. In the East, uncoordinated, inconsistent, un-certain, and frequently punitive tax regimes in-crease the cost of doing business. Subsidizedenergy prices reduce incentives to invest in moreefficient or environmentally improved equip-ment, or to increase supplies. Low fines for emis-sions violations provide little economic incentivefor the purchase and installation of environmentalequipment in many countries.

In the United States, inadequate access forsmaller suppliers to risk capital, or to financing forfeasibility studies and startup costs, greatly re-stricts the ability of U.S. small business to take ad-vantage of newly opened markets in the formerEast Bloc. Other governments are believed to of-fer more generous export credits, thus puttingU.S. companies at a competitive disadvantage inthese markets.

| Technical BarriersThe final set of barriers to trade and technologytransfer is technical in nature. These barriersinclude an inadequate regional support infrastruc-ture for high-quality technology. Trained man-power, spare parts, and supplier systems may alsonot be available locally. Differences in technicalstandards can block transfer of U.S. technology.Many countries of the region are adopting Euro-

pean Union (EU) emissions standards that aremuch stricter than the U.S. standards. U.S.technology, designed to meet U.S. conditions,may not correspond to the needs of the recipientcountry. And the costs of adaptation may be toohigh.

Integration of Western and local technologiesmay prove difficult. In some cases, improvedtechnology may not be as flexible as existingtechnology. Difficulties arise when enterprises at-tempt to mix imported and local technologies.And the energy equipment supply industry insome countries is so large that Western technolo-gies can only supplement rather than replace it.

Finally, former East Bloc governments lack ad-equate numbers of technical and business trainedpersonnel. And in the United States, companiessuffer from a lack of U.S. personnel who areknowledgeable about the countries and regionsand proficient in local languages

| Overview of U.S. and MultilateralAssistance Programs

The United States supports a large number of pro-grams designed to overcome these barriers by pro-moting the mutual benefits of energy andenvironmental technology cooperation and en-couraging the economic and institutional reformsnecessary for the diffusion of improved technolo-gy. Western energy and environmental assistancebegan in 1989-90, with the extension of aid to Po-land, Hungary, and Czechoslovakia. Energy andenvironmental assistance to the FSU began in1992, and has grown rapidly (see box 7-1 ).

Current bilateral development assistance pro-grams, operated primarily by the U.S. Agency forInternational Development (AID), the U.S. De-partment of Energy (DOE), and the U.S. Environ-mental Protection Agency (EPA), encompass awide range of functions. These include technicalassistance, training in market-related skills, provi-sion of market information, government policyadvice, research and development (R&D), andtechnical cooperation.

Other bilateral programs, managed primarilyby the Export-Import Bank of the United States


U.S. assistance to the former East Bloc is mandated under two major pieces of legislation, the Supportfor East European Democracy (SEED) Act of 1989 (PL 101-1 79), and the Freedom for Russia and Emerg-ing Eurasian Democracies and Open Markets (FREEDOM) Support Act of 1992 (PL 102-51 1). Funds for

the assistance effort have also been appropriated under other foreign aid bills as well as reprogrammed bysome agencies.

Central EuropeThe SEED Act was passed by the Congress and approved by the Administration in November 1989. It

authorized $930 million for fiscal years 1990-92. Foreign aid appropriations for fiscal year 1990 included

$659 million for Poland and Hungary. Amid much debate over the appropriate scope of U.S. assistance,Congress provided about $370 million in assistance for fiscal year 1991, along with $70 million for the new-ly formed European Bank for Reconstruction and Development (EBRD) and $3 million for Romania. In Sep-tember 1991, Congress reprogrammed $11 million in aid to start SEED programs in the Baltics. Funding forfiscal year 1992 was appropriated under a Continuing Resolution which made $370 million available for theentire region. The Foreign Appropriations Act of 1993 (PL 102-391) provided $400 million in assistance infiscal year 1993 for Central Europe and the Baltics, plus $69 million for EBRD. Although fiscal year 1994appropriations were signed into law in September 1993 (PL 103-87), portions of this appropriation wererescinded in February 1994 (PL 103-211 ) to offset the costs of earthquake relief for California. Under therevised 1994 appropriation, foreign assistance for Central Europe and the Baltics totaled $390 million andEBRD received no funds.

Former Soviet UnionU.S. assistance to the FSU has consisted of a number of commitments made bilaterally and to multilat-

eral organizations. Assistance to the FSU, and in particular to Russia, began in 1990 with the extension offood credits ($5,1 billion) and assistance in the destruction of weapons ($800 million). In 1992, Congresspassed the FREEDOM Support Act, which provided a comprehensive framework for U.S. foreign aid pro-grams for the FSU and authorized $410 million for humanitarian and technical assistance for fiscal year1993. On April 1993, at the U.S.-Russian Vancouver Summit, President Clinton announced a $1.6-billlonaid package for Russia, composed completely out of funds that had already been appropriated, includingunder the FREEDOM Support Act. Shortly thereafter, on April 15, 1993, at a meeting of G-7 ministers, theU S. announced an additional $1.8 billion in assistance. Congress funded $1.6 billion of this assistancethrough a supplemental appropriation for fiscal year 1993, attached to the foreign operations appropriationbill for fiscal year 1994 (PL 103-87). That bill provided an additional $904 million for fiscal year 1994, for atotal of $2.5 billion in additional assistance.

SOURCES Congressional Research Serwce, selected Issue briefs and reports for Congress

(Eximbank), the Overseas Private InvestmentCorporation (OPIC), and the U.S. Department ofCommerce (DOC), provide backing to the U.S.private sector to encourage U.S. business to play akey role in the rehabilitation of the regional energysector.

As the largest shareholder in the multilateraldevelopment banks (MDBs), the United Statesalso actively exercises influence in their large

project lending programs. Much of the past andanticipated lending has been to the oil and gas in-dustry and the power sector. However, there arealso active programs for coal and energy effi-ciency.

Bilateral and multilateral lending is designed toprovide the capital to overcome economic barriersto technology transfer. Conditions attached tosome lending programs, especially from the

Chapter 7

Fiscal years 1990-94Source funding ($ million)

World BankCentral Europe 1,651

FSU (Russia) 1,210

Total 2,860

European UnionCentral Europe (PHARE) 550FSU (TACIS) 123

Total 673

EBRDCentral Europe 220FSU (Russia) 250

Total 470

United StatesCentral Europe 151

FSU 93Total 244

* Does not Include bilateral trade-promotion programs

SOURCE U S Congress, Office of Technology Assessment, 1994

MDBs, are intended to force countries to make theinstitutional changes that are crucial to reform.

As illustrated in table 7-2, the bulk of assistancefor energy-sector development comes in the formof World Bank loans. Lending by the EuropeanBank for Reconstruction and Development(EBRD), though smaller, also provides energy-related development financing. European Unionenergy-related development programs provide al-most three times the level of resources as U.S. bi-lateral assistance programs.

U.S. government agencies have pursued differ-ent energy-related development assistance poli-cies in Central Europe and the FSU. In Central

Assistance, Trade, and Investment Programs | 153

Europe and the Baltics, U.S. assistance has fo-cused on diversifying sources of energy supply,rehabilitating and modernizing the energy supplyinfrastructure, improving end-use energy efficien-cy, and controlling pollution. In the FSU, main-taining and increasing oil and gas production hashad clear initial priority.

While much U.S. energy assistance has envi-ronmental components, particularly with regardto air pollution and greenhouse gas emissions, theoverall assistance effort has not been nearly as en-vironmentally oriented as was anticipated in itsearliest phase. This is due, in part, to the recogni-tion of other priorities, especially economic revi-talization. 3

EVALUATION OF U.S. PROGRAMSSince most programs addressing energy and theenvironment in the former East Bloc are quite re-cent in origin, it is not possible at this point to offerdetailed critiques. Nevertheless, even on the basisof limited experience, it is possible to identifyboth particular strengths and incipient weak-nesses in the collection of programs dealing withassistance to the energy sector. It is also possibleto identify the external constraints that limit theeffectiveness of U.S. and multilateral programs.Before considering the strengths and weaknessesof U.S. programs, it would be useful to reviewthese constraints.

| Constraints on U.S. and MultilateralPrograms

U.S. programs have been developed and imple-mented under difficult circumstances and under avariety of political, institutional, and financialpressures. Considerable political pressure was puton agencies to disburse funds quickly to give vis-ible evidence of Western support for the new re-gimes following the end of the Cold War. Allagencies have experienced difficulties in recruit-

3For ~xample, see: G(Jrdf~n Hughes, “Are the Costs of Cleaning Up Eastern Europe Exaggerated? Economic Reform and the Environment!’”

Oxjbrd Re\ieu oj’Economic Policy, vol. 7, No. 4, 1991, pp. 106- I 35.


ing permanent staff with the necessary area exper-tise. AID programs have been developed andcarried out during its own reorganization, andwith staff cuts affecting personnel in programs forthe region. The ongoing reorganization at AID isdesigned to provide the agency with further flexi-bility and streamlined contract procedures, but inthe meantime has hampered program develop-ment. Continuing pressure on all agency budgetshas limited resources available to finance devel-opment and lending programs.

A further extenuating circumstance is thatmany programs are lodged in institutions thatwere designed for different types of operations.The World Bank and AID, for example, were de-signed for projects in developing countries whoseexperiences and needs differ considerably fromthose of the former East Bloc. In some cases, suchas the World Bank negative pledge waiver, agen-cies have been asked to abandon policies that theyconsider crucial for carrying out their worldwidemission in order to provide assistance to the for-mer East Bloc countries.

Eximbank is a striking example of an agencybeing obliged to combine differing functions incarrying out programs for former East Bloc coun-tries. The primary mission of Eximbank is to sup-port U.S. exports. The bank is not a developmentassistance agency; but the Oil and Gas FrameworkAgreement for Russia, which is a major support toU.S. exports, is also a cornerstone of U.S. finan-cial assistance to the FSU countries. Eximbanktherefore has had to balance the different politicaland economic pressures arising from the percep-tion that it is an instrument of industrial, trade, anddevelopment policy.4 In addition, the EximbankFramework Agreement has encountered major or-ganizational and procedural problems thatdelayed its final implementation for almost a year.

Conditions in the recipient countries have alsonot been conducive to rapid and efficient disburse-ment. In several countries, especially in the FSU,highly unstable political conditions have ham-pered or prohibited program development. It isdifficult to plan specific energy improvements inthe context of a drastic economic restructuring,falling living standards, and institutional disarray.

An important additional factor affecting thesuccess of U.S. and multilateral programs is thedifficulty of ensuring that countries adhere to thepolitical and economic conditionality attached toassistance. To receive World Bank loans, for ex-ample, countries are typically expected to raiseenergy prices and encourage market reformthroughout the energy sector. In practice, how-ever, governments often resist the discipline ofprice reform and the privatization of energy enter-prises, and thus make it difficult to advance assist-ance. This has been one of the principal factorsholding up aid for Russian economic reform ingeneral, and for Russian energy sector assistancein particular.

Reluctance to accede to conditionality can af-fect demand for assistance as well. Several U.S.agencies report a shortage of viable projects in theFSU countries, either because of lack of interest orunwillingness to accept conditions attached to fi-nancial assistance. In several countries, notably inthe Russian oil and gas sectors, there is both amarked ambivalence toward the type of assistancethe United States can offer, and a deep-seated sus-picion of foreign investment.

| Strengths of U.S. ProgramsThe U.S. government and Congress moved withexemplary speed to develop energy assistanceprograms in support of reform efforts. Agencies

4For ~ dlxu~~lon of Eximbank’s multiple roles, see Richard E. Feinberg and Stuart K. Tucker, “ExPofl Credits in U.S. Tmdet Development?

and Industrial Policy,” in Rita M. Rodriguez, The Export-Import Bank at Fi&: The International Ern’ironment and the Institution’s Role (Lex-

ington: Lexington Books. 1987). See also U.S. General Accounting Office, Exporl Finance: The Role of the U.S. Export-Import Bank, GAO/

GGD-93-39 (Washington, M: U.S. Government Printing Office, December 1992).


have been quick to develop new programs or ex-pand the scope of old ones as new needs have aris-en. These programs appear to have beenprosecuted with vigor and enthusiasm.

OTA’s survey of the existing programs showsthem to be comprehensive in coverage. Withinoverall budget constraints, they address the mainbarriers to reform previously discussed. Programshave been developed to help ease capitalconstraints for both energy supply and conserva-tion projects, to promote energy sector and ma-croeconomic reform, and to provide a wide rangeof technology and technical assistance. Particular-ly strong efforts have been made to include theU.S. private sector in these efforts. All in all, thereare no obvious major gaps in the coverage of U.S.programs, though their size, design, and imple-mentation are open to debate (see below andch. 8).

U.S. programs have shown considerable flexi-bility and responsiveness to changing conditions,even over their short period of operation. Therewas a clear shift in the early years of the assistanceeffort from promising to provide energy and envi-ronmental technologies directly, to a strategy ofbuilding the policy and institutional capacity toenable countries to absorb new technologies. Ef-forts have also been made to respond to early criti-cisms of the U.S. effort, some of which were citedin the previous OTA report. These included toomany temporary consulting missions, lack of in-country expertise, slow procurement, and confu-sion over country needs due to a regional approachto aid disbursement. The energy projects in Cen-tral Europe are now developed on a country-by-country basis. In the FSU, contract delays at AIDhave apparently slowed project startups, but AIDhas established in-country missions at an earlystage.

| Weaknesses of U.S. ProgramsDespite the many achievements of the past years,major weaknesses to U.S. assistance haveemerged. One major set of weaknesses is relatedto the scale of the assistance effort and to problemsin program design and implementation. The pro-liferation of initiatives has caused problems.There are abundant reports from officials of for-mer East Bloc countries of their being swampedby visiting missions and the resulting technical as-sessments. There is a further perception that theassistance available is going largely to foreignconsultants rather than the recipient countries.5

The large number of agencies offering broadlysimilar services raises major problems of coor-dination and duplication.

Coordination between the various donors, fair-ly low during the first years of assistance, has con-tinued to be a problem.6 There are several cases oflack of donor coordination that seriously weakenthe entire effort. For example, while the WorldBank supports an oil export tax as an efficientmeans of bridging the wide gap between domesticand export oil prices, other government agencies,more concerned with the promotion of foreign in-vestment, strongly oppose it. There also continuesto be lively competition among bilateral assist-ance programs to influence technology choices informer East Bloc countries. This can result in du-plication of effort and a concentration on too nar-row a group of technologies.

However, progress is being made in other areas.Currently, the World Bank, EBRD, AID, and theEU have several joint energy projects, including amajor power sector restructuring project in Po-land. Also, there is a more systematic data collec-tion process under way to keep track of energy

Ssee for example, Barry NewMan, ‘“Disappearing: Act: West Pled:ed Billions Of Aid to Poland—Where Did It All Go’?,” The Wall Swcc(

Journa/ (Feb. 23, 1994), pp. A 1, 8; John J. Fialka, ‘“Helping Ourselves: U.S. Aid I(J Russia IS Quite a Windfal—lF(Jr U.S. Consultants,” The Wa//Street Journal, Feb. 24, 1994, pp. A 1, 8.

%e lack of coordination is repined in U.N. Ec(m(mlic and !N)cial C(mncil, Ec(mornic Commissi(m for Europe, Comrniltee on Energy,“Multilateral Assistance to Economies in Transition m the Field of Energy: A Preliminary Overview and Evaluation,” Geneva: Aug. 28, 1992, p.9.


project requests in the FSU, managed by the In-ternational Energy Agency.

Underpinning these weaknesses in imple-mentation lies a more serious and fundamentalproblem: a developing uncertainty over the bestmeans to achieve U.S. policy aims in the region, ifnot the nature of those policy aims themselves.The original program emphasis in the FSU—widely shared by all agencies and most Westernindustrial countries—was on oil production proj-ects, mainly through private sector investments.This emphasis was accompanied by MDB lendingprograms designed to supplement and leverageprivate investment. Oil and gas received the mostattention because production in that sector couldmost quickly generate the extra foreign exchangeneeded to underwrite the reconstruction of the en-tire economy.

The assumptions behind this strategy are nowin doubt. It is proving more difficult to achieve theanticipated production increases, partly becauseof the lack of enthusiasm in some host countries,notably Russia, for Western programs and theconditions that accompany them. There is also thebelief in some international oil circles that govern-ment support of an active MDB oil policy and ex-pansion of bilateral export credits underminesforeign investment by reducing the need for gov-ernments and enterprises to deal directly with pri-vate Western companies on an equity-stake basis.

The rationale that underlies the distribution offunds among the many countries of the region isalso not clear. The allocation of assistance withinthe energy sector is open to question, particularlythe emphasis on expanding supply, despite the im-mense potential for energy conservation. The re-luctance of some host countries, especiallyRussia, to cooperate in key parts of the assistanceprogram raises questions about the wisdom or fea-sibility of the present approach.

This is an opportune moment to use this experi-ence in the assistance programs to re-examine thetotality of U.S. efforts toward the former EastBloc in light of original U.S. policy objectives,

and to suggest improvements in programs thatsupport those our policies. These issues, especial-ly the need to define U.S. goals and priorities, areelaborated in greater detail in the next chapter.

SURVEY OF ENERGY ANDENVIRONMENTAL PROGRAMSEnergy and environmental programs fall into twobroad categories: development assistance and pri-vate sector support. In principle, the primary ob-jective of development assistance is directassistance to the recipient country. Trade and in-vestment support, on the other hand, is primarilydesigned to help domestic industry. In practice,the distinction between the two is becoming in-creasingly blurred, for a number of reasons. First,benefits to U.S. industry can create a strong con-stituency for development assistance, especiallyimportant in times of budget stringency and reces-sion. Second, export and investment promotionefforts are a natural concomitant to the recent em-phasis on privatization and the primacy of the pri-vate sector in technology transfer. Third, projectfinance is becoming increasingly complex, in-cluding both multilateral, bilateral, and privatesector participants. Fourth, greater private sectorparticipation can screen ill-designed projects.

On the other hand, critics complain that themerging of development assistance and exportpromotion can compromise developmental goalsand skew existing development programs in thedirection of export promotion.

| U.S. Programs to Assist Former EastBloc Development

Assistance programs were designed first for Cen-tral European countries and then the FSU. The tworegions will be discussed separately because of thedifferences between the programs. Additional in-formation is included in chapters 3 and 4. Currentbudget data are listed in chapter 8.


Central Europe and the Baltics7

U.S. energy and environmental assistance to Po-land has centered around a group of projects dem-onstrating U.S. know-how in Krakow. TheSkawina Retrofit project has installed advancedU.S. clean-coal technology at a 550-MW (mega-watt) plant near Krakow chosen by a U.S.-Polishproject steering committee. This technologychoice reflects the growing priority given to theexport of U.S. clean-coal technologies by DOE,building on its extensive Clean Coal TechnologyProgram in the United States.8 In July 1991, Air-pol, a New Jersey-based firm, was awarded a$7.6-million contract to install emission Controls

on two 50-MW boilers.9 The powerplant subse-quently bought another.

Polish power sector assistance has several ele-ments. The Power Sector Restructuring, Privati-zation, and Management program providessupport for a multidonor power sector restructur-ing initiative developed by the World Bank andthe Polish Ministry of Industry. AID contractorsare working on increasing the efficiency of power-plants and transmission and distribution systems,privatization, and corporate management. A de-mand-side management and demonstration pro-gram is under way, and a utility partnershipbetween Commonwealth Edison Co. and the Pol-ish Power Grid is examining management issues.

In Hungary, the power sector and energy effi-ciency are also the primary focus of U.S. assist-ance. The New England Electric Co. and theHungarian Power Cos. Ltd partnership has fo-cused on improving management, financial sys-tems, and consumer relations. A complementary

Combined Heat and Powerplant, Krakow, Poland

program will address key regulatory and privati-zation issues. Building on energy audits undertak-en in 1991, AID is assisting in commercializinglow-cost efficiency technologies, developing lo-cal private energy service companies and jointventures, and establishing training programs forpromoting private investment in oil, gas, and coal.

Energy efficiency is also a major element ofU.S. assistance in the Czech Republic and Slova-kia. SEVEn, the energy efficiency center inPrague, conducts outreach to the private sector.Several towns in the Czech Republic, includingCesky Krujlov, Plzen, and Ostrava, have ongoingenergy efficiency and pollution reduction demon-stration projects.

TThl~ ~ectl(}n summarizes and U@ates projects by country or at a regional level (where new information k available), f(wusing on clean

coal, electric power, oil and gas, and environmental components. For additional inf(mnati(m, see OffIce of Technology Assessment, EnergyE~iciency Technologies jtir Central and Eastern Europe.

Ssee u s ~pa~ment of Energy, c/can cod Technology Export Programs, National Energy Strategy Technical Annex 6, ~WS-oo95p. .( 1991/2).

gwhile ]Inllted to U.S.-based firms, the specificati(ms for the pro~ct had to be adjusted (restrictions on foreign ownership were relaxed ~d

the S02 emissions reduction target reduced from 70 percent to 65 percent) to allow for a sufficient number of U.S. bidders. Further detail can bef{mnd in ch. 4. Background to the project and the bidding process can be found in U.S. General Accounting Office, Fossil Fue/s: DOE’s Ejtirt foPrmide C/can Coal Technology 10 Po/and, GAO/RCED-91 -155 (Washington, DC: U.S. Government Printing Office, May 1991 ).


In the power sector, Houston Lighting andPower Co. and the Czech Power Co. (CEZ) haveformed a partnership. AID contractors will pro-vide additional technical assistance to CEZ andsupport for privatization efforts.

In Slovakia, a utility partnership has beenformed by Southern Electric International (Geor-gia) and the Slovak Electric Power Company(SEP), focused on management, organization, andfinance. Follow-on power sector restructuringmeasures are being defined by AID in cooperationwith SEP and the Ministry of Economy. In the oilsector, a study of options for upgrading heavy oilprocessing has been undertaken at the Slovnaft re-finery in Bratislava.

In the Baltic countries, AID is attempting tostimulate the development of a domestic energyservice industry. The first phase had focused on aseries of energy efficiency audits. In the powersector, AID is assisting in pricing and model con-tracts for international electricity contracts. A util-ity partnership has been formed between CentralVermont Public Service and Latvenergo (Latvia).A partner is being sought for the Lithuanianutility.

AID is also conducting regional efforts in Cen-tral Europe and the Baltics. A major initiative is aproject to rationalize the refining and oil transportsector. This will include developing a database,identifying policy. legal, and institutional factorsto improve competitiveness, and identifying a listof potential capital projects.

The Former Soviet UnionAs in Central Europe, U.S. energy and environ-mental assistance to the FSU is undertaken byAID, DOE, and EPA. AID has attempted to buildin-country representation more rapidly than inCentral Europe.

NIS Task Force

In January 1992, AID formed the Washington-based New Independent States (NIS) Task Force,linked to AID field missions, which currently in-clude Moscow (Russia), Kiev (Ukraine, Belarus,and Moldova), Almaty (Kazakhstan, Turkmenis-tan, Kyrgyzstan, Tajikistan, and Uzbekistan), andYerevan (Armenia, Georgia and Azerbaijan). Thetask force’s energy program has four stated strate-gic objectives: 1. energy pricing policy and insti-tutional reform. 2. energy efficiency andperformance improvements. 3. energy productionand delivery system improvements. and 4. nuclearpower safety. 10

Energy Pricing Policy and Institutional Re-form. This component aims to introduce energypricing reforms and sector restructuring and pri-vatization. Another key element is training andexchanges between energy companies in theUnited States and the Former Soviet Union.

In Russia, assistance included planning for pri-vatizing state-owned energy producers, reformingthe price and tariff structure, and introducing anappropriate regulatory framework in the energysector. The Institute for International Education isproviding technical assistance and training to de-velop a petroleum commodity exchange in Mos-cow. Technical assistance has been given toUkraine, Kazakhstan, and Armenia in drafting na-tional energy plans and formulating privatizationstrategies. DOE is heavily involved in drafting anew oil and gas law, and implementing legislationfor Russia.

As in Central Europe, AID has begun a pro-gram of twinning and exchanges between U.S. en-ergy companies and those in the FSU. Thisprogram is discussed in chapter 4.11 The EnergyIndustry Partnership Program (EIPP) for the New-ly Independent States includes companies and

loNucIear ~)wer safety prtyyanls are reviewed in ch. 4.

1 l~e Elpp’5 pro:re55 15 rep)ne~ ~ua~er]y in /JsEA_Fo(,us on (he Ne\+ [n(iependent S(a(es and in the USEA Annual Report 1992.


associations from the electric power, gas, and pe-troleum sectors. AID funding for the EIPP is $7.2million over three and a half years, with additionalfunding from participating companies.

Energy Efficiency and Performance Im-provement. This component has focused on im-proving efficiency in electric power, refineries,industries, and residential buildings. Some fund-ing was also directed to support the Moscow Ener-gy Efficiency Center. Three U.S. engineering andconsulting firms assessed efficiency options in se-lected district heating systems in Armenia, Bela-rus, Kazakhstan, Kyrgystan, Russia, and Ukraineand identified appropriate instrumentation andequipment to improve efficiency.

Energy Production and Delivery SystemsImprovements. This component will improveproduction from existing power facilities, devel-op additional power generation capacit y from safesources, and promote demand-side efficiency inkey parts of the energy sector. One of the long-term goals is to provide alternative energy sourcesneeded to decommission unsafe nuclear reactors.

Partners in Economic Reform, a U.S. nongov-ernmental organization consisting of the NationalCoal Association and the AFL-CIO, is providingadvice on the management and safety of coalmines in Russia, Ukraine, and Kazakhstan. In Ar-menia, AID contractors helped prepare a $57-mil-lion loan from the EBRD to complete the Hrazdanpower generation facility. AID is also conductingfeasibility studies in Russia on greater efficiencyin gas transmission.

DOE is proposing Oil and Gas Centers for themajor oil- and gas-producing areas of Russia, pro-viding information about U.S. technology andservices. Functions would include seminars andtraining, matching of U.S. companies with Rus-sian production associations, and technical assist-ance for economic, financial, and field analysis.

Gore-Chernomyrdin CommissionPresident Clinton and President Yeltsin agreed atthe Vancouver summit meeting in May 1993 to es-tablish a joint commission on energy and spacecooperation. Vice President Gore and Russian

Prime Minister Chemomyrdin were appointed tochair the commission, which met for the first timein September 1993. Agencies involved with thecommission include DOS (overall policy and in-ternational coordination), AID (funding coordina-tion), DOE and the Nuclear RegulatoryCommission. Nuclear assistance is discussed inchapter 4.

Much of DOE’s activity in the Russian energysector is focused around the Gore-ChernomyrdinCommission. DOE has divided this program intothree working groups. DOE’s commercial andlegislative working group sets up energy-infra-structure demonstration projects to educate Rus-sians in business practices. Its largest effort so farhas been a project to open 25 gas stations in theMoscow area. This group has also promoted thedevelopment of production-sharing agreementsas an interim measure to facilitate U.S. involve-ment in oil and gas development. In the legislativearea, DOE was heavily involved in drafting oiland gas law. Finally, the commercial and legisla-tive working group sends U.S. academic advisorsto the FSU to provide policy assistance.

An oil, gas, and coal development workinggroup has developed seven projects to promotetechnology transfer and joint research. Its mainproject so far has been an oil and gas technologycenter located in the Russian city of Tiumen, thecapital of the West Siberian oil and gas region.This technology center is designed to link Westerncompanies and technologies with Russian enter-prises.

DOE’S energy efficiency working group is cur-rently working on 24 projects. The largest project,financed by a one-time transfer of $125 millionfrom the AID commodity import program (fiscalyear 1994 funds), facilitates purchases of U.S. en-ergy-efficiency technologies. The working groupis also conducting a study of energy use and alter-native sources, with an emphasis on replacing theFSU’s most dangerous nuclear reactors.

DOE’s total budget for FSU activities is only$3 million (with a separate nuclear safety line of$73 million). Agency personnel note that thesmall size of the budget limits their activities.


They also note that the way in which funding isrouted (all money must pass through AID beforecoming to DOE) adds a layer of bureaucracy to analready cumbersome system. Finally, DOE offi-cials would like to have more direct authority tonegotiate energy-related agreements. These offi-cials note that the United States is the only West-ern country in which the State Department (or itsequivalent), not the Department of Energy, takesthe lead in negotiating energy-related agreements.

Environmental AssistanceAID and EPA are jointly undertaking a number ofenvironmental projects. EPA is focusing its pro-grams on three areas of activity: strengthening thecapacity of environmental institutions, focusingresources on environmental “hot spots” and re-gional environmental management, and demon-strating environmental and energy technologies.EPA participated in a joint mission with the WorldBank to plan with the Russian government twomajor Bank energy and environmental loans: theOil Rehabilitation Project and the forthcomingEnvironmental Project. A key objective of thejoint mission was to leverage limited U.S. grantassistance with the larger World Bank projects.

Bilateral Energy Agreementsand Working GroupsEnergy cooperation with Russia and other FSUcountries has accelerated since 1992 but the im-mense potential for science and technology coop-eration between the United States and Russia, aswell as other FSU states, has only begun to betapped. The United States and the Russian Federa-tion Framework Agreement on Scientific andTechnical Cooperation in the Field of Fuel andEnergy provides for data exchanges, joint proj-

ects, and private sector contacts in a number of en-ergy areas, including energy efficiency andrenewable. A U.S.-Russian Joint Committee es-tablished under the agreement meets annually.DOE plans to pursue Fuel and Energy Agreementswith other FSU states, with an initial focus on Ka-zakhstan, Ukraine, and Azerbaijan.

DOE also supports the U.S./Gazprom WorkingGroup, which brings together U.S. and Russiangas industry officials to develop joint projects,and an Oil and Gas Equipment Working Groupunder the U.S.-Russia Business DevelopmentCommittee. There have been delays, however, inorganizing the International Science and Technol-ogy Center headquartered in Moscow. The found-ing parties, which included Canada and Sweden,pledged $70 million in fiscal year 1993, with a$25-million share from the United States. There isalso an agreement (signed in June 1992) to estab-lish a science and technology center in Kiev, Uk-raine, with a $10-million donation from theUnited States, but friction over Ukraine’s nucleararsenal has delayed the program.

| Multilateral Programs to Assist FormerEast Bloc Development

Much of the energy and environmental assistanceto the former East Bloc is channeled through mul-tilateral initiatives, primarily the World BankGroup and the EBRD.12 The Central Asian Re-publics of the FSU have applied for membershipin the Asian Development Bank (ADB).13 TheGlobal Environmental Facility (GEF) also pro-vides multilateral financing. Assistance on policyand research issues is provided by the Internation-al Energy Agency, the U.N. Economic Commis-sion for Europe, and the European Energy Charter(see box 7-2).

Izof tie $28.4 bi]lion G-7 Mu]ti]ateral Assistance Package for the FSU announced at the Tokyo Ministerial Meeting in April 1%$ $] 7.9

billion was to be provided through the lntemational Monetary Fund, the World Bank, and EBRD.13~ July 1, 1993, tie ADB*S Board of Directors proposed 10 approve the membership of Kazakhstan, Kyrgyzstan, and Uzbekistan tenta-

tively for Nov. 30, 1993. Tajikistan, Turkmenistan, and Azerbai@n have also applied for membership. Like the other regional developmentbanks, the ADB provides loans and equity investments for projects, technical assistance, and other advisory services in support of projects. TheADB annually lends over $6 billion, with energy/power and the environment being two mjw sectors. U.S. Department of Commerce, B/SNIS,July/August 1993, p. 6.


The European Energy Charter is a polltical declaration of principles, objectives, and actions that aims tocreate a new framework for cooperation, investment, and trade in energy across Europe and possiblyacross the world. The charter was Initiated by the European Community (now the European Union) with themajor objective of integrating former East Bloc countries into world energy markets, Following severalmonths of preparation, it was signed by 43 countries, including the United States, in December 1991, andseveral others since then. A legally binding “basic agreement” to the Charter and additional protocols arecurrently under negotiation.1

The charter’s objectives are organized around three functional areas energy trade, international coop-eration in the energy field, and energy efficiency and environmental protection. The first two of these in-include provisions to promote more sound legal frameworks for energy activities, access to energy re-sources, lower barriers to trade in energy goods and services, efficient management and use of energyresources, modernization of Infrastructure, information exchanges, research and development, and policy

consultation. 2

1 Richard Greenwood, ‘cThe European Energy Charter A New Framework for Pan-European Energy Cooperation, ” Energym Eu-rOfX3, NO 19, July 1992, pp 69-72

2 “Concluding Document of the Hague Conference on the European Energy Charter” (The Hague, Netherlands Dec 16-17,1991)

The World Bank GroupThe World Bank14 is the most influential multilat-eral organization affecting energy and the envi-ronment in the former East Bloc, lending almost$3 billion for energy projects between 1989 and1993. The policy framework for Bank energylending in the region is laid out in the country eco-nomic memoranda that typically precede lending,and in energy sector conditionality attached toloans. Conditions include raising energy prices toworld market levels, restructuring and privatiza-tion of energy sector enterprises, and encouragingforeign investment. The power sector and districtheating have been the major focus of Bank energylending in Central Europe, while oil and gas willdominate in the FSU.

Central EuropeThe Bank has been assessing problems of com-mon regional concern through the Central andEastern Europe Network for Regional Energy(CEENERGY) program, in coordination with theEuropean Union, United States, and the Interna-ational Energy Agency. 15 C E E N E R G Y seeks to fa-

cilitate technical assistance and pre-investment

activities in high priority areas. It has supportedstudies of petroleum refining and transport, elec-trical power interconnection and trade, natural gastrade, energy efficiency in the context of environ-mental impacts, and the impact of Soviet energyexports on Central Europe.

World Bank energy and environmental projectsin Central Europe are heavily concentrated in Po-

1 me World Bmk Group Consls[s of [he International Bank for Reconstruction and ~vetopment, the lntemational wveltJPmnt Ass{~ia-

tion, the lntemational Finance Cm-p., and the Multilateral Investment Guarantee Agency.

I s~e followlng” project descriptions are drawn from Bernard G. Montfort ~d Harold E. Wackman, “The World Bank Support for EnergySector Transformation in Central and Eastern Europe” (World Bank, July 1992); and The World Bank, “Central Europe Department ProjectsRelated to Energy/Envirorm~ent” (May 17, 1993).


land, with loans of almost $1 billion approved in1990-1993 (most of which are for the energy sec-tor), and several more in the preparation stages.The policy framework for the energy lending wasnegotiated with the Polish government in 1990and 1991. Energy price increases, were supportedin a structural adjustment loan in 1991 ($300 mil-lion) and also in the first energy loan the EnergyResource Development Project approved in 1990(the World Bank loan is for $250, million with $60million in cofinancing from the European Invest-ment Bank, toward a total project cost of $648million). The project also sought to encouragefuel switching from coal, and development of aregulatory framework to support privatization andjoint venture arrangements.

The subsequent Heat Supply Restructuring andConservation Project approved in 1991 (theWorld Bank loan is for $340 million, with $50million in cofinancing from the EBRD, toward atotal project cost of $619 million) continues sec-tor-wide restructuring and introduces moderntechnologies into the district heating system. ACogeneration Privatization Project (the tentativeloan amount from the World Bank is $120 milliontoward a total project cost estimated at $320 mil-lion), will promote private investment and owner-ship of major powerplants in Krakow andthroughout the country.

A Power Transmission Project will rehabilitateand reinforce the existing electric power transmis-sion system, and develop the transmission systemto meet essential reliability requirements and in-ternational standards.

There are two prospective World Bank energyprojects in Poland. The Coal Sector Restructuringand Environment project, anticipated for Boardapproval in early 1995, will support coal sector re-structuring,. The Power Privatization project aimsto promote independent power production andjoint ventures between Polish powerplants andforeign investors.

The power sector is the major focus of theWorld Bank in the Czech Republic and Slovakia.

The Power and Environmental ImprovementProject ($246 million toward a total of $557.5 mil-lion) aims to reduce the environmental impact ofpowerplants in Northern Bohemia, through in-creasing the efficiency of powerplants and the reli-ability of the CEZ transmission system. Flue gasdesulphurization equipment and particulate con-trol (dust and ash) will be installed.

The Second Czech Power Project (about $200million;) will improve system security and opera-tional reliability and also assist in completing therestructuring of CEZ.

There are two prospective projects in Slovakia.The Slovak Gas project ($150 million, with pro-posed cofinancing with EBRD) would support anew international gas pipeline to increase domes-tic consumption and security of supply. The Slo-vak Power project would assist the SlovakElectric Power company in improving thermal ef-ficiency and reducing pollution at the Vojanypower station through installation of circulatingfluidized-bed boilers.

In Hungary, the Bank is undertaking an energy/environment project ($1 00 million for a total costof $213.2 million) to support diversification of en-ergy supply, energy conservation, and environ-mental protection. The project would include:

| construction of a gas-fired combined cycle co-generation unit of 230 MWe (megawatts elec-trical) and 240 MWt (megawatts thermal) atDunamenti powerplant;

| upgrading of Hungary’s existing Energy Man-agement System;

■ assistance for environmental planning andmanagement and,

● training and institution building in the powersector.

Former Soviet Union (FSU)In Russia, priority elements of an initial energypolicy package consist of energy price reform andthe development of a regulatory framework tostimulate investment in the oil and gas sectors. 16

l~e Wlorld Bmk, Ru~~lan E1.onomlt. Reform: cr~ssing [he Thresho/d ~j’Stru~./ura/ change (Washington, ~: World Bank, September

1992), pp. I 80-81.


Bank energy and environmental lending to Russiaincludes several large projects under way or inpreparation. A $610-million loan has been ap-proved toward a $1-billion Oil RehabilitationProject aimed at reviving oil production in West-ern Siberia. A natural gas project has also beenidentified $300 million) that would assist in re-ducing losses in gas distribution and enhance ex-port potential. The petroleum sector could also beaffected by a $300 million environmental projectunder preparation, to reduce gas flaring, repairpipelines, and increase recovery of liquids fromnatural gas. The Bank estimates that lending to theRussian energy sector could average between$500 million and $1 billion annually for the nextseveral years.

The Oil Rehabilitation Project is intended to bethe first in a series of large projects designed tohelp stabilize oil and gas production in the FSU,strengthen the managerial and technical capabili-ties and the financial viability of the participatingoil producer associations, and mobilize cofinanc-ing. Three oil producer associations in WesternSiberia were chosen for the project: Kogalymnef-tegas, Pumeftegas, and Varyeganneftegas. A keyelement will be promotion of a policy frameworkthat will increase foreign investment. The Bankaims to stimulate levels of investment of between$2 billion and $3 billion annually in Russia’s oiland gas sector.

The project is intended to increase national oiloutput by 3 percent per year and bring in $1.5 bil-lion in annual oil revenue. The loan will supportrepairs at 1,300 oil wells, drill 84 new wells in ex-isting fields, and replace 1,000 kilometers of pipe-line.

The Bank is also undertaking energy sectortechnical assistance and preparing project lendingin Ukraine and Moldova (power sector) and theCentral Asian Republics (primarily oil sector re-habilitation). In Kazakhstan, two projects are inpreparation—a technical assistance loan of about$20 million for fiscal year 1994 and a rehabilita-

Drilling Rig, West Siberia

tion loan of about $150 million for the Uzen oilfield.

The International Finance Corp.The International Finance Corp. (IFC) is the pri-vate sector arm of the World Bank. The IFC typi-cally makes loan and equity investments of nomore than 25 percent of project cost and has an up-per limit of $100 million.

In Russia, the IFC is currently supporting twooil and gas projects. A loan of $60 million hasbeen made to the Polar Lights Co., a joint venturebetween Conoco and Arkhangelskgeologia in theArdalin oil field in Northern Russia. About $11million is being provided to a joint venture involv-ing Canadian Fracmaster and two Russian entities


for increasing production at existing wells inWestern Siberia.17

The IFC is also increasing its participation inprivate power projects.18 A new infrastructure in-vestment group was formed in 1992 to assist theIFC in increasing its portfolio of power projects,including a 400-kV (kilovolt) transmission lineunder consideration in Poland.

The European Bank for Reconstruction antiDevelopment (EBRD)The European Bank for Reconstruction and De-velopment (EBRD), through both its public sectorand merchant banking activities, has approved al-most $800 million for the energy sector.19 Its larg-er energy loans have for the most part beencofinancing components of World Bank powersector and oil sector rehabilitation projects, al-though some smaller loans have been made for en-ergy efficiency.

The Bank’s short-term priorities are as follows:repairing and rehabilitating existing supply facili-ties (e.g., oil and gas pipelines); completing exist-ing high-priority projects (e.g., transmission linesand power stations already under construction);assisting countries to diversify sources of energysupply; and private sector projects that promotediversification of supply and the injection of for-eign capital (e.g., projects to bring existing oil andgas fields on stream). The Bank will also assistgovernments with emergency energy sectortechnical assistance in response to energy short-ages and hardships resulting from economicrestructuring.

Central Europe and the BalticsThe EBRD began its energy lending in 1991, witha $50-million cofinancing of the World Bank’sHeat Supply Restructuring and Conservationproject in Poland. In 1992, energy loans totaling$200 million to public sector operations focusedon supply rehabilitation, completion of projectsunder construction, and end-use efficiency im-provement. The Bank has also increased technicalcooperation activities.20

Latvia, Lithuania, and Estonia were all recipi-ents of loans to support Energy Sector EmergencyInvestment for $37 million, $44 million, and $47million, respectively. Each loan focused on reha-bilitation of energy supply facilities and end-useefficiency. On the merchant bank side of its opera-tions, the EBRD has made several loans to energycompanies in Central Europe, including expan-sion of generator producing capacity.

Former Soviet UnionAs in Central Europe, EBRD lending for majorenergy projects in the FSU has typically been cofi-nanced with the World Bank and export creditagencies. The Bank is providing $250 million incofinancing for the World Bank Oil RehabilitationProject in Russia and has loaned the ArmenianMinistry of Fuel and Energy $57 million to com-plete a powerplant. The Bank is also undertakingfeasibility studies for rehabilitation of gas pipe-lines.

On the merchant banking side, the Board hadapproved five private projects on oil and gas for atotal of$188 million to Russia. Four of these proj-

lyln~tjMa] ~lmce Corp., Oil and Gas Division, “lFC Investments in the CM and Gas Sector,” (June 1993).

ISJWk D. Glen, private Sector E/ectric@ in Developing Counrries: Supply and Demund, IFC Discussion %Per 15 (Washington, DC: me

World Bank and the International Finance Corp., 1992).

l% EBRDJS ~si~cy t. ]end too quickly orc~atively has been widely noted. Most countries in the former &st BIOC apparently ngwdthe Bank’s lending as too cautious, too little, skewed toward larger infrastructure projects, and not supportive enough of the private sector. Bankofficials concede that it is not cost effective for the Bank to lend less than 5 million ecus. Also, they maintain that the EBRD’s status as a merchantbank necessitates a cautious 6eginning to its lending, See Karol Okolicsanyi, “Eastern Views of the EBRD,” RFE/RL Reseurch Report, vol. 2,No. 23, Jun. 4, 1993, pp. 502.

%3RD, Ad Report, 1992.


ects were joint ventures with U.S. and Canadiancompanies, and cofinancing partners include theIFC, OPIC, and Eximbank. These loans include:$33 million toward a loan of $90 million for a Ca-nadian Fracmaster project; $40 million for a$300-million project by Chemogomeft in TiumenProvince; and $90 million for Conoco’s Polyar-noye Siyanie project in Archangels province,with OPIC lending $50 million and Eximbank apossible $60 million.

The Global Environment FacilityThe Global Environment Facility21 (GEF) cur-rently has one energy project in Central Europe, acoal-to-gas conversion project in Poland cofi-nanced with the World Bank. The GEF/WorldBank contribution is $26 million toward a $52million project. The project has several objec-tives, including an investment component thatwill initially convert two coal-fired boilers in Kra-kow to gas-fired, and a technical component thatwill address institutional and energy efficiency is-sues. The project also has been allocated a portionof a $4.5-million cofinancing grant from Norwayto simulate joint implementation arrangementsbetween Norway and Poland. Other prospectiveGEF projects include providing lines of credit forenergy efficiency demonstration zones.

| European and Japanese AssistancePrograms

The EU has a large and multifaceted program ofenergy and environmental assistance with formerEast Bloc countries. The “request driven”PHARE program engages in a diverse set of acti-vities similar to the U.S. assistance program, in-cluding policy guidance, training, energyefficiency audits, and installing flue-gas desul-

Pumping Station Samotlor Field, Nizhnevartovsk.

phurization equipment. The EU’s Technical As-sistance Programme to the Commonwealth ofIndependent States (TACIS) was begun in De-cember 1990. Energy had an allocation of $132million in 1991 ($61 million for nuclear pro-grams) and $167 million in 1992 ($115 million isfor nuclear programs). Non-nuclear activities in-clude oil, gas, and power sector projects, energyefficiency, and energy centers. The DirectorateGeneral for Energy’s (DG XVII) Thermie pro-gram undertakes market assessments, tradepromotion events, and energy efficiency audits.

Energy projects are also financed by the Euro-pean Investment Bank (EIB), an autonomous or-ganization within the EU structure that fundscapital investment projects. Energy and the envi-ronment are a component of the “Europe Agree-ments,” signed with Poland, Hungary, the CzechRepublic, and the Slovak Republic that seek toprovide the basis for the future integration of thosecountries into the EU.

A number of European countries and Japanhave bilateral energy and environmental activities

Zlln 192, the Global Environmental Facility (GEF) was designated as the interim financial mechanism for the Framework COnventi(Jn on

Climate Change. The GEF replenishment, estimated at between $2 billion and $3 billion, will be substantially devoted to projects that reducegreenhouse gases, including energy efficiency, renewable energy, and cleaner fossil energy.


in Central Europe and the FSU.22 These programsvary widely in scope. Most offer small technicalassistance programs on a grant basis and access toexport credits. Priorities for the Western Europeancountries include transboundary pollution con-trol, power sector rehabilitation and transmissionconnections between East and West, oil and gaspipelines, and, increasingly, access to the oil andgas resources in the FSU.

Bilateral relations often reflect a mix of histori-cal ties, geographical proximity, and national in-terest. For example, Scandinavian environmentalassistance is concentrated in the countries thatshare the Baltic sea coastline and that also accountfor a large share of transboundary pollution.

Germany has focused its bilateral energy pro-grams in Hungary and Russia. Austria’s energyassistance programs are focused on pollution andpower sector rehabilitation in the Czech Republicand Slovakia.

Japan’s assistance activities have included in-dustrial energy efficiency audits in Hungary andsending a survey team to Russia to establish thebasis for more extensive future contacts. Japan hasannounced a $1 .2-billion package of bilateral aidfor the FSU, a large part of which will be devotedto the construction of a facility for the disposal ofnuclear waste.

Like the United States, other bilateral donorssometimes coordinate assistance with the WorldBank and other multilateral lenders. The UnitedKingdom for example, is participating with theWorld Bank on power sector restructuring in Po-

land, and the Netherlands is providing cofinanc-ing for technical assistance to the World Bank oilrehabilitation project in Russia.

| U.S. Trade and Investment ProgramsWestern assistance for the former East Bloc wascomplemented from the beginning by efforts tostimulate trade and investment.

A large number of U.S. government agenciesare involved in energy and environmental exportassistance to former East Bloc countries. DOC,AID, DOE, OPIC, and the Trade and Develop-ment Agency (TDA) provide export and invest-ment promotion, such as market information,training, conferences, official visits, and in-coun-try support for business. Eximbank, OPIC, TDA,and, to a lesser extent, AID and DOE provide fi-nancing for exports, projects, and investments.

The proliferation of activities led to some con-fusion. Establishment of the Trade PromotionCoordinating Committee (TPCC) should im-prove coordination. The TPCC was initiated bythe Export Enhancement Act of 1992 (Public LawNo. 102-429). Chaired by the Secretary of Com-merce, it consists of all 19 federal agencies23 in-volved in export promotion plus the NationalSecurity Council and the National EconomicCouncil. The purpose of the TPCC is to provide anexport promotion strategy, coordinate and priori-tize the government’s export promotion activities,and provide a central source of information.24

zzReviewsof these activities relating toenergy efficiency can be found in International Energy Agency, “Energy Efficiency Update, No. 14,

March 1992, and U. N., Economic Commission for Europe, East- West Energy Efficiency: Policies, Pro,grammes, Technologies, and Who’s Who(New York, N. Y.: United Nations, 1992). On European and Japanese environmental aid programs generally see U.S. Congress Ofllce ofTechnology Assessment, Development Assistance, Export Promotion, and Environmental Technology Background Paper, OTA-BP-ITA-107 (Washington, DC: U.S. Government Printing Office, August 1993), pp. 55-69.

zJ~pmments of Commerce, Agricu]~re, Interior, Labor, State, Treasury, Defense, Energy, and Tr~s~)flation; the Agency for Intern-

ational Development, Environmental Protection Agency, Export-import Bank, Council of Economic Advisers, United States Information

Agency, United States Trade and Development Agency, United State Trade Representative, Office of Management and Budget, Overseas Pri-vate Investment Corporation, Small Business Administration.

2~e Ct)mmitt= is ~qui~d t. submit ~lluai reP)rts to Congress. The first report, entitled, Towards a Na~iona/ EXp~rt Stralegy, w~ sub-

mitted in September 1993. This report emphasizes the need to combine functions, allocate resources strategically, involve the private sector,

practice aggressive advocacy, evaluate export promotion efforts, and reduce export controls.


In Central Europe there has been modest butgrowing demand for U.S. technologies and ser-vices in the power sector, in air pollution control,and in energy efficiency. By far the greatest de-mand for U.S. investment could be in the oil andgas sector in the FSU. While the large oil compa-nies have operated extensively across the world,many other U.S. energy companies and much ofthe environmental industry have not had a stronginternational orientation. Awareness of the largepotential offered by a large and growing globalmarket, a declining U.S. share of those markets,and, in some cases, the concomitant maturation ofthe U.S. market have increased industry interest ingovernment involvement in supporting exportsand overseas investment.25

Information ProgramsU.S. information about business opportunities inCentral Europe and the FSU is channeled througha variety of sources. DOC’s Eastern EuropeanBusiness Information Center (EEBIC) and theBusiness Information Service for the Newly Inde-pendent States (BISNIS) act as clearinghouses fortrade and investment opportunities for U.S. busi-nesses. 26 DOC’s U.S. and Foreign commercial

Service (US&FCS) undertakes export promotionactivities in the region. Electric power technolo-gies and oil and gas equipment are promoted as a“best prospect” for U.S. trade in several countries.

International conferences, trade missions, andreverse trade missions can also be cost-effectivemeans of promoting business. TDA and DOEhave funded, and cofunded, a number of energy

and environmental conferences and visits of offi-cials.27

In-country support of business development isprovided by a growing network of business cen-ters that provide visiting company representativeswith services such as telephone and fax, tempo-rary office space, market information, and assist-ance in making business contacts. The AmericanBusiness Center is open in Warsaw, Poland, andthe FSU American Business Center Program,funded by AID, plans twelve centers. TheUS&FCS also has offices throughout Central Eu-rope and in the FSU and is planning a substantialincrease in personnel.

The DOE-managed energy efficiency centersengage in business development, including U.S.liaison support with U.S. companies, and in de-veloping the Automated Eastern Europe andNewly Independent States Information System.The Czech and Slovak center, SEVEn, supports aseries of energy efficiency business weeks featur-ing energy management and efficiency programsand appliances.

Other types of trade promotion activities in-volve increasing U.S. commercial opportunitiesat the multilateral and regional developmentbanks. There is also support for firms seeking pro-curement opportunities at the banks. The DOCOffice of International Major Projects maintains areference room of World Bank and EBRD (andother regional development banks) project docu-ments, project pipelines, and provides procure-ment liaison officers.

Z5U.S. ~p~men[ of Energy, National Energy Strategy: Analysis oj’Options to Increase Exports of U.S. Energy TeC-hnology, Technical

Annex 5 (Washington, DC: U.S. Government Printing Office, 1991/1992); Interagency Environmental Technologies ExIMtis Working Group,U.S. Department of Commerce, Environmermd Technologies Expor/s: Srralegic Framework jiw U.S. L.eudership (Washington, DC: U.S. Gov-ernment Printing OffIce, November 1993).

‘2~e EEBIC pub]ishes the &.r/ern Europe Business Bu//e/in, on a monthly and sometimes bimonthly basis, which includes general in-

formation on trade and investment as well as specific business opportunities in the energy sector and in energy equipment. It also produces theoccasional publication, Easlern Europe Looks jbr Parmers, which provides information on joint ventures in specific sectors. BISNIS similarlypublishes the BISNIS Bulletin.

27TheW include a U.S. Power Technologies Conference in Prague in My 1992, followed by BuckPest, September I ~~, ~d visits by ener-

gy officials from Poland, Hungary, the Czech Republic, Latvia, and Lithuania.


Pre-Export and Pre-investment FinancingSeveral different U.S. government agencies, in-cluding Eximbank, OPIC, TDA, and AID, pro-vide pre-export financing for energy firms, whichcan lead to follow-on export or project opportuni-ties. U.S. firms have lobbied in recent years for anincrease in government funding for feasibilitystudies. The TPCC has recommended that all U.S.government funding for feasibility studies becentralized in the TDA.

TDA, the primary source of funding for feasi-bility studies, has steadily increased its energy andenvironment activities in the former East Bloc.These studies have been undertaken by U.S.firms, including Westinghouse, Bechtel, Enron,Fluor Daniel, Foster Wheeler, and Black &Veatch. Other project development funds includethe Capital Development Initiatives for energyand the environment, managed by AID.

Financing for Exports and InvestmentEximbank and OPIC financing for the region hasgrown significantly since 1989. Both agenciesface persistent demands to increase financing inthe region. Energy capital goods are a key strate-,gic sector.

Eximbank ProgramsEximbank programs are designed to support ex-ports that would not otherwise attract private sec-tor financing, by offering loans with longer termmaturities, providing export credit insurance, andcountering export credit subsidies of foreign gov-ernments. While not explicitly stated as such bythe Bank, which is not a development lender, thecredits to former East Bloc countries are integralto U.S. foreign policy objectives of stabilizing the

region economically and demonstrating U.S. fi-nancial commitment to its development.

The Bank is directed to support “key indus-tries” that, among other things, export high value--added products, develop new capital goodstechnologies, and support highly skilled jobs inthe United States.** Energy capital goods exports,particularly electric power and oil and gas, havebeen a large component of Eximbank’s lending inrecent years. The Bank has also received congres-sional mandates to reach targets in certain otherenergy and environmental sectors. A target for re-newable energy exports of 5 percent of total ener-gy exports was set in 1990 and adhered to sincethen. 29 Under the Export Enhancement Act of1992, Eximbank was required to support the ex-port of goods and services that have “beneficial ef-fects on the environment or mitigate potentialadverse environmental effects.”

Eximbank offers short-term and medium-termloans and guarantees in most of Central Europeand the Baltics. By fiscal year 1992, the Bank hada total exposure of about $647 million in Poland,$196 million in the Czech and Slovak Republics,and $1.7 million in Hungary. The Bank beganlending to the then-Soviet Union in 1991. By fis-cal year 1992, its exposure in Russia was $115.5million .30

But the poor quality and unreliability of the na-scent banking sector and the indebtedness of thestate sector in Russia makes sovereign borrowingdifficult. To promote capital goods exports, Exim-bank has been seeking alternatives to sovereignlending by offering various types of “limited re-course” financing, including project financingand a large export credit line for oil and gas equip-ment.31

zgExP)~.]mPJ~ Bank, Ann~/ Reporf /992 (Washington, ~: 1993).

Zgsee U.S. Genera] Accounting OffIce, Export Promotion: Federal Eforts to Increase Exports oj”Renen*able Energy Te~.hnO@ies, GAO/GGD-93-29 (Washington, DC: U.S. Government Printing OffIce, December 1992).

3~e Bank’s tota] exP)su~ as of Sept. 30, 1992 was $41.8 billion.J 1 Limited rec(~ur~ fin~cing is lending that is securedon the cash flow and earnings of the pro~t rather th~ the gummtees from (rect)um

to) the pro~ct ownerdsponsors.


The Bank’s project financing is available fortransactions that involve over $50 million in U.S.content. It applies to new projects, not expansions,which can be structured as BOT (Build OperateTransfer), BOOT (Build Own Operate Transfer),BOO (Build Own Operate), or variations. Projectfinance loans are looked at more favorably if theyinvolve cofinancing with other ECAs and/or com-mercial banks. The first project financing deal puttogether for the FSU was a $47-million joint ven-ture between Anderman Smith and Chemogoneft,a private, Russian-owned oil and gas productioncompany. Exporters benefiting will include Halli-burton Company, National Oilwell, and NationalEngineering and Constructors.32

But the bulk of limited recourse financing willcome under the U.S.-Russia Oil and Gas Frame-work Agreement signed in July 1993, estimated toprovide financing for $1 billion of U.S. oil, gas,and petroleum equipment and services. The op-eration of the agreement was delayed pending ne-gotiations over the World Bank’s negative pledgeclause. This clause requires World Bank borrow-ers to avoid further liens on any public assets al-ready pledged for Bank loans and to allow theBank to claim priority over others in repayment ofdebt. This clause has effectively precluded stateoil enterprises in the FSU from pledging their as-sets as security for foreign credit.33 The WorldBank recently agreed to waive this pledge forlending to Russia’s oil and gas sector.

This waiver clears the way for Eximbank fi-nancing, which will be secured from the hard-currency sales of the oil and gas produced underthe project. To qualify for a loan under the limita-tions set out by the World Bank as conditions forthe waiver, the oil and gas equipment must beshown to provide incremental oil, that is, oil notavailable without the equipment purchase. Ap-plications for financing under the agreement thusrequire a great deal of technical and financial in-

formation from all parties to the deal, notably in-cluding a yield consultant report on the technicaland economic feasibility of the transaction Anoth-er limitation of the agreement is that many oil andgas equipment transactions are on a smaller scalethan the financing minimum of $25 million.

The offering of export credits can alsointroduce a distorting effect into the recipientcountry’s development path. Since export creditstypically support heavy capital goods on attractiveterms, or make accessible capital goods thatwould otherwise be unavailable, borrowers maybe biased toward capital-intensive imports. Thisquestion has also been raised with respect to theRussian need for imports of U.S. oil and gasequipment, given the existence of a huge Russianand Azerbaijani oil and gas equipment industry,which, while not as technologically sophisticatedas that of the United States, nevertheless sup-ported the extensive development of Soviet oiland gas. At this point (spring 1994) it is too earlyto assess the likely success of the Eximbankframework agreement (see ch. 8 for further dis-cussion).

OPIC ProgramsOPIC’s financing for U.S. investors in former EastBloc countries, which includes political risk in-surance, loans, and guarantees, is oversubscribed.Political risk coverage, in particular, is a major re-quirement for many companies wanting to dobusiness in the region. Table 7-3 reviews OPICenergy and environmental financing for the re-gion.

OPIC is increasingly active in the FSU oil andgas sector, with financing for projects by Ander-man Smith, Conoco, and Texaco. Assistance in oiland gas projects includes both political risk insur-ance and loan guarantees. However, OPIC haslimitations on the type of financing and size of the

3z..ca~pian ~oge~s Top C.1.S. Deals”, (?j/ and GUS Journa/ , vt~l. 91, NO 24! 1993, P“ 20”

JsJeffrey A. B~fl, ..pt)sltlve Mt~vement on the NegatiVe Pledge,” Russian Perro/eum /n~’eStOr, March 1993~ P. 52.


Country Recipient Amount (U.S.$) Type of assistance

Poland Air products and Chemicals 12,029,000 Insurance(industrial gas)

Hungary General Electric (lighting) 150,000,000 InsuranceCzech Republic and Slovakia Environmental Systems Corp. 250,000 Insurance

(monitoring)Russian Federation Anderman-Smith Overseas 7,000,000 Insurance

(oil and gas)Russian Federation Conoco (oil and gas) 50,000,000 Loan guaranteeRussian Federation Texaco (oil rehabilitation) 28,000,000 Loan guarantee

SOURCE OPIC, 1994.

projects it supports. The ceiling on loan guaran-tees will probably be raised to $200 million (fromthe previous $50 million) in line with TradePromotion Coordinating Committee recommen-dations.

OPIC has also supported a “Russia CountryFund,” which is expected to generate severalhundred million dollars of investment in the Rus-sian economy. 34 The fund will provide equity to awide range of new businesses, expansions, andprivatizations, with particular emphasis on energyand environmental projects.

Enterprise FundsEnergy and environmental companies doing busi-ness in Central Europe and the FSU may also beeligible for enterprise funds established by theU.S. government to foster overseas investmentand private sector development. The funds areconverted to small and medium size funds Suchfunds have been established in Poland (1990),Hungary (1990), the Czech and Slovak republics(1991 ), and Russia ( 1993). The funds emphasize

the financing of firms in the recipient countriesand the joint ventures with U.S. firms, but willalso finance U.S. companies doing business in therecipient countries.

| European and Japanese Trade andInvestment Programs

Most European countries and Japan have exportcredit agencies (ECAs) and investment promotionand financing programs against which U.S. pro-grams are often negatively compared.35 Indeed,export financing supports a much higher percent-age of many of these countries’ exports than doU.S. programs. European and Japanese govern-ments are reported to be more aggressive in sup-porting deals by their companies than is theUnited States. But the exposure of the Europeanand Japanese programs in the former East Blocgenerally, and in the energy and environmentalsectors specifically, is difficult to monitor.

The Japan Export-Import Bank is preparing a$1.5-billion line of credit for the FSU that wouldinclude financing for a refinery in Uzbekistan be-

JdManaged by paine Webber, [nc. in cooperation with ]nternationa] Economic coo~mtk)n.

35F{)r Sumeys of other countfies programs, see U.S. General Accounting OffIce, Exporf Promofion: A Comparison oj’prwrarns in Fivelndusfria/ized Counmies,” AO/GGD-92-97 (Washington, DC: U.S. Government Printing Off’’ce, June 1992); William E. Nothdurft, GoingG/oba/: How Europe He/ps Small Firms Export (Washington, DC: The Brookings Institution, 1992); and Therese J. Belot and Dale R. Weigel,Programs in Industrial Countries to Promote Forei~n Direct Investment in Developing Countries, Foreign Investment Advisory Service, Occa-sional Paper 3 (Washington, DC: The World Bank, 1992).


ing constructed by Marubeni Corpo and ChiyodaCorp. An EU political risk insurance fund for en-ergy investors in the FSU has reportedly beenstarted by Energy Private Investment Support, aprivate bank consortium with between $6 billion

36 Also, the invest-and $12 billion in resources.ment activities in the former East Bloc of Euro-pean state-owned energy enterprises, such asElf-Aquitaine (France) or Statoil (Norway), couldbe considered a form of export assistance, given

these companies’ access to public finance. U.S.companies benefit from European and Japaneseexport financing, but are required to reduce sharp-ly the level of U.S.-made components. For exam-ple, a U.S. supplier to a petrochemical project inthe FSU reported having to reduce U.S. compo-nents to less than 5 percent when financing wassought at Italian and Japanese export credit agen-cies. 37

3bC1ted in u S ]n[ematlona] Trade Commission, “Trade and Investment Patterns in the Crude Petroleum and Natural Gas sect~~rs ~Jf we. .Energy-Producing States of the Former Soviet Union,” Publication 2656 (Washington, DC: U.S. lntemationa] Trade Commission, June 1993)pp. 5-3 and 5-4.

J7U.S. ~paflment of Commerce, “Obstacles to Trade and Investment in the New Republics of the F(mner Soviet Uni(m” (Washington, DC:U.S. Government Printing Office, March 1992), p. 21.

assistance, trade, and investment programs 7

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