Addressing Environmental Liabilities in Privatization in Bulgaria Workshop on CEA, SEA and Development Policy Lending Adriana J. Damianova South Asia Environment and Social Sector Unit The World Bank January 2005

Presentation Overview  Nature of environmental liabilities  Policy issues  World Bank support and lending Instruments  Enabling framework and policy choice  Key design and implementation principles  Designing public – private partnership for compliance  Benefits and lessons learned

Nature of Environmental Liabilities  Exist at the time of privatization as “stocks”  Relate to an identifiable actor (owner, legal successor)  In analogy to a “public good” liabilities categorize as a “public bad” and posses features of “non- rejectability” by affected people  Liabilities are externalities which cannot be addressed by behavior-modifying instruments  Market failure is a result of imperfect information, high transaction cost and potential free-rider problems

Policy issues  Inherited damages from past production relate to ownership, not to outputs  Response should aim at turning “ public bad ” into a “ private bad ”  Identify competent policy and decision makers and their perspective on the social cost and benefits for addressing the liability problem

World Bank Support and Lending Instruments  Environment Remediation Pilot Project: US$16 Million (Copper Smelter /UM Belgium)  Environment and Privatization Support Adjustment Loan: US$50 Million (Oil Refinery, Steel Mill, Open Copper Mine, Fertilizer Plant, and Pharmaceutical Plant)

Enabling policy and regulatory framework Strategic update of NEAP National Privatization Plan Privatization Act and supporting by-laws Environmental Protection Act Water Act EIA Regulation Regulation on Principles and Procedures for Determining State Liabilities for Historical Pollution Methodological Guidance on Past Environmental Pollution

Stakeholders and Beneficiaries Bank involvement facilitated partnerships between stakeholders and beneficiaries : Ministry of Environment and Water and Regional Environmental Inspectorates Ministry of Finance Privatization Agency Firms ’ management Investors Municipalities Local population

Issues and challenges before the Government in late 90-ites  Ambitious sector restructuring and privatization program supported by the Bank (FESALI and II)  Resistance of reputable investors to commit to environmental compliance unless pollution “ stocks ” are resolved  Significant health risks in industrial hot spots from past pollution  Growing public pressure to address social and environmental risks  Weak governance structure and regulatory framework to deal with environmental uncertainties in the privatization

Opportunities Privatization is a “window of opportunity” to eliminate policy and regulatory roadblocks to privatize polluting industries and improve corporate environmental compliance Improve investment climate, attract reputable investors and re-capitalize enterprise assets Improve local environmental conditions and address long-standing public health concerns

Implementation principles for designing lending support Enabling policies and legislation in place Procedures for accountable and transparent use of public resources Assessment of liabilities based on risk assessment methodology (EIA, Environmental Remediation and Compliance plans) with public involvement Promote cost effective remediation techniques based on assessment of environmental risk Clear implementation procedures and agreed institutional responsibilities for monitoring of environmental performance of privatized plants

Implementation Framework Sales Purchase Agreements with environmental compliance plan based on standards acceptable to regulator and regulated entity Implementation Agreement with agreed performance indicators to show implementation progress Agreement on inter – agency implementation and post- privatization oversight (structure,functions responsibilities, reporting etc.) “ After-care program ” for sustainability of project measures agreed prior to completion

Policy Outcomes Effective mainstreaming of environment in sector reforms and investment planning Policy and instruments for addressing environmental liabilities in place Improved institutional capacity and enhanced public-private partnership in environmental management Enhanced role of environmental agencies and improved institutional coordination Better collaboration among donors

Direct economic benefits Increased FDI in privatization Positive effect on demand for clean up technologies Sharing clean up costs Increased budgetary revenues Improved corporate governance Increased company value due to reduced risks and uncertainty Positive effect on local economic growth from private sector Gains from increased property value

Social and environmental benefits Mitigation of risks and protection of human health and sensitive ecosystems Partial offset of adverse social impact of privatization from prolonged demand for new jobs and new employment opportunities for local population Improved environmental monitoring and compliance of industries Cleaner ground and drinking water, more fertile farm land

Policy lessons  Most feasible policies to address liabilities are those combining environmental and economically beneficial side effects  Privatization sets a unique opportunity to set the negative value of liabilities in direct relation to present value of plants, expected stream of future incomes, and eventually its present asset value  The approach allows addressing liabilities with least involvement of the government resources ( remediation cost caps, sharing preparation and management cost)  Stakeholders ’ participation has direct interest on the company ’ s sound financial and environmental performance and incentives to reduce implementation costs

Lessons contd.  Information on environmental performance is key (audits/ EIA) and should be included in Privatization Information Memorandum  Public involvement is critical for sustaining project outcomes  Negotiations on environmental conditions should be included in individual sales and post-privatization oversight  Bank support facilitates effective collaboration and public- private partnership for environmental management  Private businesses act more responsibly to social and environment issues in a transparent environment  The model enhanced transparency and public access to information on corporate environmental performance

Old Slag Dump Rehabilitation Contaminated waste excavated and sites cleaned up November 1999 September 2002

Clean-up of Old Sulfuric Acid Plant Old sulfuric acid plant demolished and site decontaminated November 1999 October 1997

June 1999 December 2002 Closure of the sludge “Blue Lagoon” encapsulation and re-vegetation