CRITIQUE OF THE THIRD STONE AND WEBSTER
                    (APRIL 1999) ECONOMIC DUE DILIGENCE FOR K2R4





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The proposals for funding the completion of Khmelnitsky 2 and Rovno 4 (K2R4) have been under development by the European Commission and the European Bank for Reconstruction and Development (EBRD) for over five years and consumed tens of million Euro and thousands of person days of work. Despite a concerted and continual effort by many companies, institutions and individuals to see this project move ahead with financing from the EBRD, Euratom and Western Export Credit Agencies, the project is no closer to meeting the lending criteria of these institutions than it was in June 1994. While there are many standards and conditions that the completion project must fulfil to be acceptable as a project for funding by these agencies, such as environmental and nuclear safety, much of the media, Non-Government and Governmental interest has been focused of late on the economic viability of the project. There are a number of reasons for this:

Lending Requirements:
The international agreement which first connected the closure of Chernobyl with the possible completion of K2R4 was the Memorandum of Understanding (MoU) signed by the G7, EU and the Ukrainian Government in December 1995. The MoU states: -

"Ukraine and the G-7 will work with the international financial institutions as well as foreign and domestic investors to prepare loan-financed projects based upon least cost planning principles for completion of Khmelnitsky II and Rovno IV nuclear reactors… the investment program will identify least-cost power supply investments to meet Ukraine's future national power requirements in the context of a competitive market based power sector"1

Since conception of the project EBRD has been proposed as the prime co-ordinator for the funding package. Further EBRD’s energy policy states: -

"Such projects [completion and upgrade of nuclear plants] would have to meet the same least-cost criteria (including the review of supply and demand side energy alternatives) as non nuclear projects…"2

Limited Investment Opportunities:
The investment climate in Ukraine is such that there is only limited access to the necessary finance and availability of Ukrainian Government guarantees. Over 1998-9 Ukraine has been close to defaulting on its international debt, and the position shows little sign of improvement, if any. As of January 1999, Ukraine foreign exchange reserves stood at less than $US 1 billion, just enough to cover half a months imported goods and services, and its foreign exchange debt stood at $US 11 billion, with $US 1.8 billion due for repayment in 1999. Therefore, any investment needs to be reviewed in the light of both what benefits such project brings against what other projects will have to be delayed or abandoned through the consequent non-access to funding, the so-called 'crowding out' effect. This is of particular relevance with large projects, such as K2R4, as their financial needs will exclude a large number of smaller projects.

Economic Due Diligence Panel:
In 1996, the EBRD commissioned an independent panel of internationally recognised experts to conduct the necessary economic due diligence. It was said that given the sensitivity of this issue, it was of the utmost importance that an independent authority undertakes this work.3 The Panel’s findings were unambiguous.

"We conclude that K2/R4 are not economic. Completing these reactors would not represent the most productive use of $US1bn or more of EBRD/EU funds at this time." 4

Given the explicit nature of the Panel’s conclusions and their clear mandate to undertake the economic due diligence, future analysis not surprisingly has been treated with scepticism by independent experts and the environmental community. In April 1999, however, EBRD requested, the US consultants Stone and Webster (S&W) to undertake new analysis of the economics for the completion of K2R4 nuclear power plants in Ukraine. This analysis updated two previous assessments undertaken by S&W, the others being completed in April 1997 and May 1998. This third assessment has not been the subjected to the same transparent scrutiny as other economic analyses because its existence has not been widely publicised and because it was produced after the public consultation process, concluded in 1998. This latter study, therefore, lacks the international acceptability and independence that is paramount for such a project.


1 Memorandum of Understanding between the Government of Ukraine and the Governments of the G-7 countries and the Commission of the European communities on the closure of the Chernobyl nuclear power plant. 20th December 1995.
2 Energy operations policy 7th March 1995, European Bank for Reconstruction and Development.
3 Terms of Reference for Economic Due Diligence by an International Panel of Experts, EBRD 2nd August 1996.
4 Economic Assessment of the Khmelnitsky 2 and Rovno 4 Nuclear Reactors in Ukraine, Volume 1: Main Report, 4 th February 1997, (Panel) page 6