Moldova Is to Determine a Realistic, Agreed and Affordable Service and to Demonstrate How Environmental Expenditure Can Be Financed

Ministry of Environment, Denmark

The purpose of the municipal water and wastewater environmental financing strategy for the Republic of Moldova is to determine a realistic, agreed and affordable service and to demonstrate how environmental expenditure can be financed. The environmental financing strategy has been developed in an iterative process in a dialogue with the finance, environmental and other relevant authorities. This report presents the final background Moldova analyses by the consultant. Background Analyses for the Environmental Financing Strategy

Ministry of Environment EAP Task Force DEPA/DANCEE DANCEE Danish Environmental Protection Agency Danish Cooperation for Environment in Eastern Europe Danish Cooperation for Environment in Eastern Europe Miljøstyrelsen, Strandgade 29, DK-1401 København K Phone +45 32 66 01 00. Internet: www.mst.dk This report was prepared by COWI AS. The work was financed by the Danish Environmental Protection Agency (DEPA) as part of the Danish Cooperation for Environment in Eastern Europe (DANCEE). The work was coordinated by a DEPA steering committee also comprising representatives of the Organisation for Economic Cooperation and Development (OECD) and the beneficiary ministries. The opinions expressed are those of the consultant. The Danish Ministry of Environment – Danish Environmental Protection Agency (DEPA), the OECD EAP TF and the beneficiary ministries may not agree with these opinions. 2000

Moldova Background Analyses for the Environmental Financing Strategy

DEPA/DANCEE Danish Environmental Protection Agency Danish Cooperation for Environment in Eastern Europe

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The Danish Ministry of Environment and Energy, The Danish Environmental Protection Agency, (The Danish EPA) has decided to fund a number of projects to provide assistance to the OECD Environmental Action Plan Task Force (EAP TF) Secretariat and directly to selected Ministries of Environment in the NIS.

The projects commenced in August 1999. The present document, “Moldova: Background Analyses for the Environmental Financing Strategy”, is one of a series of documents coming from the projects.

The projects will:

• Provide assistance in elaborating national environmental financing strategies in four selected countries in the NIS, viz.: Georgia, Kazakhstan, Moldova and Ukraine.

• Provide assistance in elaborating regional environmental financing strategies in two selected regions in the Russian Federation, viz.: Novgorod and Pskov regions.

• Provide assistance to the EAP TF in the preparation of a survey on the use of economic instruments for pollution control and natural resources management in the New Independent States.

• Conduct a study of the suitability of the OECD methodology for assessment of environmental expenditure based on case studies in Georgia and two regions in the Russian Federation, viz.: Novgorod and Pskov. ii 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ iii

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7DEOHRIILJXUHV Figure 2.1 Development diamond, Moldova 3 Figure 3.1 Development diamond, Moldova 17 Figure 5.1 Structure of employment, Moldova 1995 and 1999 31 Figure 6.1 Average monthly wage in different sectors, MDL 33 Figure 6.2 Breakdown of consumption expenditure Q2, 1999 in % 35 Figure 7.1 Government balance in percent of GDP 1989 - 1999 40 Figure 8.1 Environmental expenditure in current and constant prices 1993 - 98 43 Figure 9.1 Interest rate spreads 1991 - 98 (1 year lending and deposit rate) 50 Figure 12.1: Water utilities’ expenditure and revenues (excluding Chisinau) 82 Figure 12.2 Chisinau water and wastewater tariff by consumer group 83 Figure 12.3 Charges for water supply and wastewater treatment in selected cities. 1996 85 Figure 12.4 Charges for water supply and wastewater treatment in selected cities. 1996 adjusted for GDP per capita 85 Figure 15.1 General government balances in % of GDP 1989 - 1999 107 Figure 15.2: Environmental Funds: Main sources of income 108 Figure 15.3 Interest rate spread (1 year) 1991-98, Moldova, CEE and CIS 116 Figure 16.1 Initial financing gap 2000 - 2020, MDL million 124 Figure 16.2 Principles of rehabilitation, maintenance and operating expenditure 125 Figure 16.3 Backlog of maintenance with target expenditure and baseline supply of finance 2000 - 2020 126 Figure 16.4 Share of GDP necessary for closing the national affordability gap 127 Figure 16.5 Backlog of maintenance with 2.7% of GDP spent on urban water and with target expenditure 128 Figure 17.1 Backlog of maintenance with and without comprehensive pump replacement 132 Figure 17.2 Backlog without and with reduced WWTP service 136 Figure 18.1 Backlog without and with increase in collection rate and a slight increase in household tariffs in real terms 144 Figure 18.2 Backlog without and with increased revenues from non-household consumers 146 Figure 19.1 Backlog with target expenditure and baseline supply of finance versus user pays scenario 151 Figure 19.2 Backlog with target expenditure and baseline supply of finance versus additional public finance 152 Figure 19.3 Backlog with target expenditure and baseline supply of finance vs. USD 62 million concessional loan 153 Figure 19.4 Backlog with target expenditure and baseline supply of finance versus "additional finance" scenario 154 x 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ xi

7DEOHRIWDEOHV Table 3.1 Population in Moldova (in 1,000)...... 19 Table 3.2 Settlement structure, population excluding Transnistria, 1999...... 19 Table 4.1 Environmental Responsibilities of Local Government...... 23 Table 5.1: Share of Moldovan GDP 1994-1998...... 30 Table 6.1 Disposable income (MDL/month/pers)...... 34 Table 7.1 Selected Indicators 1994-1999...... 37 Table 7.2 Public Finance 1994-1998, million MDL, Current prices ...... 38 Table 7.3 Moldova’s External Debt (USD million) ...... 39 Table 8.1: Environmental Expenditure by Source (MDL million) ...... 43 Table 8.2 Environmental Expenditure by Type (Million MDL)...... 44 Table 8.3 Environmental Expenditure by Environmental Media (MDL million) ...... 44 Table 8.4 Revenues by Environmental Funds (’000 MDL) ...... 45 Table 8.5 Expenditure on Water Supply (million MDL)...... 46 Table 8.6: Official Development Assistance, Disbursements, 1994-99, million USD...... 46 Table 8.7: Donor Assistance in the Environmental Sector, million USD...... 47 Table 10.1 Reported discharges of pollutants from wastewater treatment plants into surface water (1993-1998) ...... 53 Table 10.2: Overview of existing situation: Water supply quality...... 57 Table 10.3: Overview of existing situation: Regularity of supply ...... 58 Table 10.4 Overview of the existing situation: Water supply service coverage ...... 59 Table 10.5 Overview of existing situation: Wastewater collection coverage ...... 60 Table 10.6 Overview of existing situation: Wastewater treatment ...... 61 Table 10.7 Summary of existing situation for water supply ...... 62 Table 10.8 Summary of existing situation for wastewater collection and treatment ...... 62 Table 11.1 Water supply service coverage for 2020. Share of population...... 69 Table 11.2 Target for water quality: Share of population receiving acceptable tap water quality.. 70 Table 11.3 Service level target (proxied by production)...... 71 Table 11.4 Targets for Wastewater Treatment...... 72 Table 11.5 Wastewater collection service coverage. Share of population...... 73 Table 12.1 Responsibilities Relating to Municipal Water and Wastewater, 1999...... 77 Table 12.2 Revenues for water and wastewater services in current prices, 1995-98...... 80 Table 12.3 Operation and maintenance expenditure 1995-98...... 81 Table 12.4 Combined Water and Wastewater Tariffs in April 2000 (MDL / m3) ...... 83 Table 12.5 Estimation of the Range of Household Water Bills...... 86 Table 12.6 Estimate of Tariff Affordability (urban users without meters) ...... 86 Table 12.7: Water Sector - Capital Investment, 1993-98, million MDL ...... 89 Table 13.1 Main input to costing of water supply infrastructure...... 95 Table 13.2 Total and average unit costs for water supply...... 96 Table 13.3 Cost correction factors for downscaling of maintenance costs...... 96 Table 13.4 Cost correction factors for downscaling of operational costs ...... 97 Table 13.5 Key input data for costing of wastewater collection and treatment ...... 98 Table 13.6 Cost results for wastewater collection and treatment - total costs in million MDL...... 98 Table 13.7 Average unit costs for wastewater collection and treatment, MDL/m3 of wastewater...... 99 Table 14.1 World Bank Scenarios for Economic Development ...... 102 Table 14.2 Population in the Projection Period ...... 103 Table 14.3 Development in Household Incomes 2000 - 2020, constant 1999 prices ...... 103 Table 15.1: Summary of baseline scenario: Supply of finance for "urban water" 2000 - 2020.... 105 xii 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 15.2 Projection of Public Expenditure in Baseline Scenario 2000 - 2020 ...... 106 Table 15.3 Forecast of Revenues for Environmental Funds ...... 109 Table 15.4 Baseline projection of revenue...... 111 Table 15.5 Baseline projection of revenue from user charges, 1999 prices...... 111 Table 15.6 Development in Revenue Generated From User Charges for Water 2000 - 2020...... 112 Table 15.7: Monthly Household Income for population connected to water supply, 1999, MDL ...... 112 Table 15.8 Estimate of Capacity of New Debt from 2008 to 2020...... 115 Table 16.1 Moldova baseline financing gap 2000 - 2020...... 119 Table 16.2 Moldova target financing gap 2000 - 2020...... 120 Table 16.3 Expenditure 2000 - 2020 (million MDL) in target scenario ...... 120 Table 16.4 Operational and maintenance costs for Apa-Canal Chisinau (ACC)...... 121 Table 16.5 Summary of supply of finance - Moldova ...... 122 Table 16.6 Baseline supply of finance at Apa-Canal Chisinau (ACC)...... 123 Table 16.7 Financing gap for Chisinau...... 129 Table 16.8 Hypothetical additional finance to close the gap and remove the backlog before 2010 ...... 130 Table 17.1 Cost savings potential from energy efficiency...... 132 Table 17.2 Cost savings potential from mechanical treatment in towns less than 10,000...... 135 Table 17.3 Cost savings potential from mechanical treatment all towns except Balti and Chisinau, no treatment in the smallest towns...... 136 Table 18.1 Direct effect of public sector financing equivalent to 2% of public expenditure ...... 140 Table 18.2 Grant Projection for Environmental Purposes ...... 142 Table 18.3 Effect of public sector financing equivalent to 2% of public expenditure and international concessional loan ...... 142 Table 18.4 Additional public sector financing and leveraged loan...... 143 Table 18.5 Household user charges billed and collected 2000 - 2020...... 144 Table 18.6 Other consumers user charges billed and collected 2000 - 2020 ...... 145 Table 18.7 Effect of increased user revenues...... 146 Table 19.1 The "User pays" scenario...... 150 Table 19.2 The "additional finance scenario" ...... 153 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ xiii

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ACC Apa-canal Chisinau BOD Biological oxygen demand CAS Country assistance strategy CIS Commonwealth of Independent States CEE Central and Eastern Europe DAC Development Assistance Committee (OECD) DANCEE Danish Co-operation for Environment in Eastern Europe EAP TF Environmental Action Plan Task Force EBRD European Bank for Reconstruction and Development EPR Environmental policy review EU European Union EUR Euro FSU Former Soviet Union GEF Global Environmental Facility GDP Gross domestic product GNP Gross national product GoM Government of Moldova IDA International Development Association IFI International financial institution IMF International Monetary Fund JSC Joint stock company LEAP Local environmental action plan MB Mechanical-biological MIA Ministry of Internal Affairs MDL Moldovan Lei MoER Ministry of Economy and Reforms MoETD The Ministry of Environment and Territorial Development MoF Ministry of Finance NBM National Bank of Moldova NEAP National Environmental Action Plan NEF National Environmental Fund NGO Non-governmental organisation NIS Newly Independent States ODA Official development assistance O&M Operation and maintenance OECD Organisation for Economic Co-operation and Development PIP Public investment programme SFS State Forest Service SMART Specific, measurable, agreed, realistic, time-bound (about environmental targets) TA Technical assistance TACIS Technical Assistance for CIS Countries (EU) TICA Turkish International Co-operation Assistance UNDP United Nations Development Programme UN ECE United Nations Economic Commission for Europe USAID United States Agency for International Development xiv 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Exchange Rate

1 USD = 10.5 MDL (average 1999) unless otherwise indicated.

Note on Prices

All prices given are given in current prices unless otherwise stated.

Note on tables

All figures have been individually rounded. Due to rounding, figures in tables may not sum to their indicated total. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 1

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3XUSRVH Environmental ex- The environmental financing strategy elaborates the need for environmental penditure needs to be expenditure that follow from specific, measurable, agreed, realistic and time- bound (SMART) environmental policy targets. These environmental policy targets have been developed based on the National Environmental Action Plan which analyses the environmental problems and sets environmental policy objectives for Moldova. The environmental financing strategy focuses on needs within the water supply and wastewater sector. This is in line with the priority of the NEAP and with the theme for the Ministerial Consultation in Almaty.

Matched by finance The environmental financing strategy contrasts these environmental expenditure needs with the supply of environmental finance that can be raised and the environmental "service" level, which the country can support in the long run from user charges (for environmental services) and public budgets.

Quantitative assess- The environmental financing strategy is based on cost modelling and quantita- ments for tive analysis. For this purpose a costing and finance decision support tool has been developed. In consultation with the advisory committee, the project team and representatives of the Ministry of Environment and Territorial Develop- ment have used the tool extensively to develop the scenarios which demonstrate the consequences of alternative policies and environmental targets.

Realistic planning There are two immediate objectives of these background analyses and the cost and attracting fi- modelling tool for the environmental financing strategy, viz: nance • To serve as a realistic planning tool at national (strategic) level;

• To be a vehicle for attracting additional finance for environmental purposes through the establishment of SMART targets and the quantitative illustration of the financing requirements to meet these.

%HQHILFLDU\DQGWDUJHWJURXS Composition of advi- This paper presents the background analyses prepared for the environmental sory committee financing strategy for Moldova. The environmental financing strategy has been developed in close co-operation with the project advisory committee. The proj- 2 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

ect advisory committee has been chaired by the Ministry of Environment and Territorial Development and has included representatives of the Ministry of Economy and Reforms and Ministry of Finance, see Annex 1. Jointly, these authorities are considered the beneficiaries of the project.

Target group The staff of these authorities as well as interested donors constitute the target groups for the background analyses. The environmental financing strategy will be developed on the basis of these analyses. It will be a brief policy document approved by the Government.

Furthermore, this paper has contributed as a background paper to the policy document drafted by the OECD - EAP Task Force Secretariat in support of Agenda Item III: "Financing Investment in the Water Sector" for the Consulta- tion between the NIS Economic/Finance and Environment Ministers on 16 - 17 October in Almaty.

$FNQRZOHGJHPHQWVDQGGLVFODLPHU DANCEE and the EAP TF Secretariat at OECD have entrusted to COWI the preparation of this paper within the framework of the project entitled "Envi- ronmental Financing Strategies, Environmental Expenditure and Use of Eco- nomic Instruments in NIS Countries"1. It constitutes a major output of the project component: "National and environmental financing strategies in the NIS". Its principal authors have been Malene Sand Jespersen, Michael Munk Søren- sen, Michael Jacobsen and Martijn Quinn. However, many others have provided helpful comments and contributions.2 These contributions not with- standing, all errors and omissions remain the responsibilities of the authors.

The opinions expressed are those of the consultant. The Danish Ministry of En- vironment and Energy - Danish Environmental Protection Agency (Danish EPA), the OECD EAP TF and the beneficiary ministries may not agree with these opinions.

1 For further information on the project please visit the project homepage. The address is: www.cowi.ru/almaty 2 Especially: Grzegorz Pezsko (OECD), Birgitte Martens, Stephanie Vincent Lyk-Jensen, Peter Lustrup, Michael Jacobsen, Niels Bent Johansen (all COWI) Corneliu Busiouc, Vic- tor Zubarev, Valentin Bordeniuc (consultants, Moldova) and Andrei Isac (Ministry of Envi- ronment and Territorial Planning, Moldova) 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 3

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&RXQWU\EDFNJURXQG Moldova is a small, landlocked and densely populated country situated between the western border of Ukraine and the eastern border of Romania. The country has a population of 4.3 million people of which 0.7 million live in Transnistria, Moldova’s most industrialised region on the East Bank of Nistru. Transnistria is de facto separated (politically and economically) from the rest of the country.

According to the World Bank3 Moldova has a GNP per capita of 410 USD.

Figure 2.1 Development diamond, Moldova

As illustrated in the figure, Moldova’s per capita GNP, access to safe drinking water and gross primary enrolment can be compared with those of the World Bank low income group.

3 World Bank: Moldova at a glance, dated 21 Sept 1999, see http://www.worldbank.org/data/countrydata/aag/mda_aag.pdf 4 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

2H\HFRQRPLFIHDWXUHV Among all the FSU, Moldova has been hardest hit in terms of economic down turn. Despite "notable progress in its efforts to reform and stabilise its economy between 1991 and the first half of 1998"4 the 1998 GDP reached a level of 32% of its 1989 level. During 1999 a further small decline was experienced.5

Total external debt of Moldova stands at more than USD 250 per capita (1998), a fourth of which is commercial credits. In addition Moldova has large energy arrears to Russia. The public sector also has considerable domestic debt. Al- though Moldova exhibits a high share of public revenues relative to GDP, public finances are severely constrained as a result of the contraction of the economy and the very substantial debt service obligations (41% of the public expenditure in 1999).

The average household income reflects the national income figures given above. Average income is less than 1 USD/person/day, and households on average spent 66% of their income on food and beverages (55% in urban areas). The population has been severely affected by the erosion of education, water supply, health and other public services.

While Moldova has made considerable progress in banking reform and interest rate liberalisation, the domestic banking sector remains fragmented and vulnerable. The domestic securities market remains underdeveloped. Domestic banks are only prepared to offer short-term loans (less than one-year maturity) and interest rates and rate spread are high. Financing of environmental investments using commercial domestic credit remains a long-term outlook.

(QYLURQPHQWDOSROLF\FRQWH[W The Ministry of Environment and Territorial Development (MoETD) is the main authority responsible for environmental policy and the management of all environmental issues. MoETD funding comes directly from the state budget. Funding covers operating costs and there is no provision made for environmental investments.

Following a reorganisation of responsibilities in May 1999, the Republic of Moldova now has two tiers of local government: Municipal government (i.e. villages and towns) and Zhudets (or regional) government.

Monitoring and control of environmental regulations is vested with the local environmental inspectorates at Zhudets level.

Provision of environmental services such as municipal solid waste management, drinking water supply and wastewater collection and treatment is the re-

4 World Bank Country Brief, see http://wbln0018.worldbank.org/ECA/eca.nsf/ 5 EBRD (1999) Transition Report 1999, Table 3.1., page 63 give data for 1998 relative to 1989. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 5

sponsibility of the municipalities. Unfortunately, their administrative capacity is rather weak (except Chisinau and maybe Balti).

In June 1996, the Government of Moldova approved the National Environ- mental Action Plan (NEAP). The NEAP is strongly oriented towards policy development and capacity building. The recognition of limited financial resources and of the limited institutional capacity is one important motivation for this approach. Still, the NEAP does propose two areas where investment activities should be prioritised: rural water supply and investments to preserve wastewater treatment and water supply infrastructure in urban areas.

&XUUHQWVLWXDWLRQ According to our calculations the replacement value of the piped water supply and wastewater systems, as they were built in Moldova, may be approximately MDL 15,000 million. The water distribution networks and raw water treatment plants have an average age of 25 - 30 years. The water sector suffers from years of under-investment and lack of funds for systematic maintenance. As a result, there is currently a large backlog of maintenance. We have assessed, although not quantified the existing backlog of maintenance. It is ours assessment that the dearth of systematic maintenance has resulted in significant, but un-planned dis-investments. The resulting service level implications are severe. Raw water sources have become more polluted and ill-maintained water treatment plants are no longer able to meet water quality standards.

In Chisinau, Balti and Ungheni water supply is regular and generally of good quality. Towns between 25,000 and 50,000 inhabitants are regularly disconnected for 4-8 hours due to energy supply problems. Disconnection and lack of pressure in the network adversely impacts the quality of supplied water. Many smaller towns are supplied from groundwater sources which do not meet the chemical hygienic standards (problems with Iron, Flour, Nitrate, pesticides etc.). These towns typically experience daily power cuts with resulting loss of regularity and water supply quality.

For towns above 25,000 inhabitants almost all wastewater is collected. For smaller towns, wastewater is typically only collected from the core of the town. The wastewater collected is generally led to wastewater treatment plants designed for mechanical and biological treatment. However, as a result of a combination of power cuts, strong reductions in water inflow to treatment plants and limited financial resources for operation, most wastewater treatment plants in Moldova operate de facto with mechanical treatment only.

The NEAP calculated the social and economic impact of water pollution and reached the conclusion that polluted drinking water (rural and urban) leads to between 950 and 1,850 premature deaths annually as well as between 2 - 4 million days of illness annually. The monetary cost to the economy was assessed to be in the 5% - 10% of GDP range. 6 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

(QYLURQPHQWDOSULRULWLHVDQGWDUJHWV The project advisory committee has suggested that the project focuses on "urban" water supply and wastewater. However, "urban" has been defined to cover all agglomerations with more than 1,500 inhabitants. Thus 80% of the population is covered.

The committee has formulated the overall environmental target for urban water supply and wastewater as "maintaining the existing situation". We have worked with the advisory committee to define more precisely, what "maintaining the existing situation means". It has been defined as described below. No new (green field) investments are foreseen, and no major rehabilitation works are foreseen. However, a "full-scale" maintenance programme is foreseen. In this document this "full-scale" maintenance is reflected both in the definition of targets (aimed at maintaining service levels) and in the calculation of costs. There are three dimensions to this formulation of the target as it implies that:

• Connection rates and capacities. The target assumes that the existing capacities will be maintained. This implies for example that connection rates will not be changed, that the dimensions of the water intake, treatment plant, networks and wastewater treatment plant will remain unchanged. Thus, the target does not imply any upgrading.

• Distribution and collection networks. The distribution and collection networks will be maintained. Specifically, it is assumed that a share equivalent to 1/n, where n is lifetime, is replaced every year. With a highly dilapidated system this will imply significant service level improvements in the early years, when the "worst" sections of networks are replaced. However, since only 1/n is replaced annually, the network average age will remain unchanged.

• Water and wastewater plants. The target assumes that the plants will come to operate according to the designed technologies, i.e. that plants that were designed for mechanical and biological treatment will also come to perform such treatment in spite of the fact that they today only provide mechanical treatment. Drinking water quality will improve to design levels as a result of among other things the implicit assumption in the target that the plants purchase and use the chemicals needed. However, as was the case for the networks, the average age of plants is assumed to be unchanged. Thus service levels may be less than for new plants of the same type.

Focusing the maintenance programme on the most urgent maintenance needs will yield relatively large service improvements in the first years. This reflects the observation made above, that dis-investment has taken place in an ad hoc fashion exacerbating the service implications. However, to precisely assess the service improvements obtainable from adequate maintenance and from making adequate resources available for operations (chemicals, power etc.) requires feasibility level studies. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 7

Furthermore it is assumed that in the long run other sectors, in particular the power sector will deliver the services for which it was designed. For example it is assumed that in the long run, there will be regular power supply to those villages (and water treatment plants) that are covered by the current distribution network. In many villages and small towns this will imply a substantial increase in the service level.

&RVWRIPHHWLQJHQYLURQPHQWDOWDUJHWV We have interpreted "maintaining existing service levels" as implying that a share of infrastructure equivalent of 1/n, where n is average lifetime is replaced every year. In other words asset value is held constant (assuming linear depreciation). Furthermore, we have assumed that this also implies a return to operations, which is consistent with the design criteria in terms of use if chemicals etc.

The total expenditure hereof has been calculated at MDL 590 million (USD 56 million) per year (fixed 1999 prices). MDL 320 million hereof cover maintenance expenditure.

MDL 270 million (USD 26 million) hereof cover the necessary operating expenditure. This level of expenditure corresponds to the current total revenues to water utilities in Moldova. In other words, current revenues are "just" enough to cover operating costs (on average). In reality, current revenues exceed operating costs in Chisinau (which therefore has revenues for some maintenance) while it is not even enough to cover operating costs in some water utilities outside Chisinau.

This implies that until expenditure can be increased from the current MDL 270 million to the level of expenditure for operations and maintenance there will be continued deterioration of infrastructure and service levels as a result of an increasing backlog of maintenance.

Considering that the most critical water related health issues relate to the population in the smaller towns provided with poor quality water, (polluted with nitrate, pesticides and bacteriological contamination), it is worth considering whether the stated objective of maintaining existing infrastructure is the most appropriate. I may be that provision of safe boreholes with handpumps in smaller towns may have a high benefit/cost ration compared to maintenance of existing infrastructure. However, to determine this requires feasibility level studies.

6XSSO\RIILQDQFH According to official statistics (financier principle) total environmental expenditure today constitutes 0.8% of GDP, most of this is for wastewater treatment. In addition hereto 2.0% of GDP is spent for water supply. The sources of this expenditure are user charges for operations (approximately MDL 265 million per year (USD 25 million)); public budget funds for capital repairs (MDL 20 - 8 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

50 million per year (USD 2 - 5 million)). Due to the Chisinau water and wastewater project where the state has to provide a grant of about 50% of the total investment, the public budget contribution will be around MDL 50 million annually in 2000 to 2002.

The level of user charges (average) is equivalent to 3.5% of average household incomes. However, reflecting a 65% collection rate the payment by households is on average equivalent to 2.3% of average household incomes. This indicates that there is considerable room for increasing user payments primarily through increased collection rates. However, two issues need to be noted. First, affordability is much better in Chisinau. This needs to be reflected in differences in user charges and service levels. Second, all water utilities have a tariff structure which implies heavy cross subsidisation of households by industry and budget organisations. For example, in Balti, the tariff for industry and budget organisations is ten times the household tariff. The heavy cross subsidisation gives rise to problems of collecting cash revenues from industries and budget organisations and this issue needs to be address as well.

Two major loans have recently been channelled to the sector. These loans have increased the supply of finance with a total of approx. MDL 600 million (USD 57.75 million) over a five-year period. An EBRD loan (USD 22.75 million) has mainly been channelled to rehabilitation of water supply and wastewater in Chisinau. In addition there is a limited component of "green-field" investments in the wastewater treatment. A Turkish loan (USD 35 million) targets partly rehabilitation, and partly "green-field" investments in extension of water supply in small towns and villages in the Southern part of the country.

Both the EBRD loan and the Turkish loan are on near commercial terms (with sovereign guarantees). Moldova cannot afford and does not have the capacity to take up further loans on near commercial terms in any large scale.

The baseline supply of finance includes only committed finance. Thus the EBRD and Turkish loans are included (the Turkish loan is assumed to be disbursed before year 2000). With regard to the future supply of international finance, this is dealt with below under "Closing the financing gap".

)LQDQFLQJJDS Taking the loans above into account, the total available funding in year 2000- 2002 is around MDL 400 million annually. This should be compared to the environmental expenditure requirements of almost MDL 800 million per year (fixed 1999 prices). The expenditure requirements result from the "maintenance and operations" expenditure of MDL 590 cited above plus loan repayments and some extra-ordinary rehabilitations, which is an integral part of the EBRD and Turkish Government loan funded projects. Hence the financing gap amounts to approximately MDL 400 million per year (2000 to 2002) and then with a falling trend over time. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 9

After 2002, annual supply is about MDL 280 to 320 million, while the expenditure decreases gradually to MDL 520 million due to cost savings (implemented through the Chisinau water and wastewater project) and finishing of the repayment of the Turkish and EBRD loans. Thus, the initial financing gap decreases from MDL 340 to 200 million by the end of the 20-year period.

&ORVLQJWKHILQDQFLQJJDS Fundamentally, the financing gap may be reduced through an increased supply of finance or through reduced demand for environmental expenditure or a combination of the two.

,QFUHDVLQJWKHVXSSO\RIILQDQFH There are several options, which may reinforce each other, including:

• An increase in public (capital) expenditure available for water supply and wastewater treatment.

Currently the level of capital investments in water supply and wastewater is only MDL 20 million or 0.8% of total public expenditure net of debt servicing. An aggressive increase to 2.0% of total public expenditure (after debt servicing) would imply an increase to MDL 50 million. However, this implies more than a doubling of public capital expenditure to the sector. However, the commitment in the Chisinau water and wastewater project implies such an increase in the public budget, as more than MDL 100 million over three years is supposed as state grant in the financing plan for the Chisinau water and wastewater project. Maintenance of this share of public sector capital expenditure in the water sector after year 2002 could contribute significantly to closing the financing gap.

• Additional foreign financing on concessional terms (IDA terms or similar).

We have assumed that an increase in public capital expenditure for water supply and wastewater of MDL 1 million can attract additional foreign concessional financing to the sector to the tune of MDL 3 million. Partly this may be "fresh" money, but it is likely to largely be a re-allocation of donor support towards the water and wastewater sector. We have assumed that a level of public capital investments of MDL 35 - 45 annually over a five year period will leverage a loan totalling MDL 651 million in additional foreign finance over five years. MDL 130 million per annum (USD 12 million) is equivalent to 6% - 10% of the total official development assistance which Moldova has received per annum in recent years. It is thus a high, but not unrealistic share for the water and wastewater sector.

• Increase user charges to 3.8% of average income and increase collection rates for households to 85%. This is partly planned to be achieved in Chisinau already as a result of the Chisinau water and wastewater project. The big potential is therefore in maintaining these charges and collection 10 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

rates. The annual potential hereof grows from around MDL 30 million in year 2000 to MDL 230 in year 2020, when projecting household income (and charges) to follow GDP growth.

• For other consumers a combination of long term removal of cross subsidies, improved collection rates (to 85%) and long term elimination of non- cash payments6 leads to additional revenues in year 2000 of MDL 32 million, but a reduced revenue in 2020 coincidentally also at MDL 33 million. This reflects that the collection rate is assumed to rise steeply, while the removal of cross subsidies is done over a 20 year period.

This requires a number of important institutional changes to reduce reliance by the public sector on arrears and non-cash forms of payment.

• Moldova has in recent years received approximately MDL 33 million annually in grants for the water and wastewater sector (mainly for technical assistance). It should be possible to maintain this level of grant financing. However, this should be based on a determined policy to continue to focus donor attention on water supply and wastewater and to integrate environmental policy concerns in other policy areas (such as consideration of groundwater and surface water pollution as part of agricultural projects).

In addition the following policy measures would support the above options for increasing the supply of finance:

• Integration of environmental policy concerns in other policy areas (e.g. agricultural projects should also address soil erosion and groundwater and surface water pollution). The MoETD is already active in this area;

• Focussed attention on attracting grant donor finance to water supply (possibly coupled with agricultural projects).

• Use of the revenues of the national environmental fund in a focused way on a few key water supply projects. This requires enforcement of a clear strategy and an effective project cycle;

• Reviewing existing water and wastewater tariff policies with the aim to phase in the reduction of cross-subsidisation in a manner which does gives revenue losses that can be handled.

• Reviewing public budgeting practices with the aim to ensure timely payment of water bills in full by budget organisations;

• Reviewing enforcement of water payments, including, but not limited to the option to cut-off non-payers (including budget organisations);

6 Here we value current non-cash payments at 70% of their book value. Thus if currently MDL 100 million is paid in non-monetary forms, we value this at MDL 70 million and we find that MDL 30 million can be gained from achieving cash payments. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 11

• Reviewing the payment procedures for water bills;

5HGXFLQJHQYLURQPHQWDOH[SHQGLWXUH There are two basic ways in which the demand for finance can be reduced:

• making cost savings in regard to the provision of existing levels of service; and

• reducing the level of service offered.

Cost savings Energy consumption currently represents approximately 50 - 60% of the operational expenditure by water utilities. Reducing the demand for energy would therefore go a long way to reducing overall demand for finance. The currently ongoing rehabilitation project in Chisinau includes energy efficiency improvements, reduction of leakage and wastage.

As currently, Chisinau accounts for two-third of the operational costs, a large share of the potential for cost savings are already included in our baseline.

The following proposals have been put forward by the Moldovan authorities:

• Replacing all existing pumps (which are highly inefficient) with modern ones. The estimated energy saving of such a measure would be up to 50% of total energy use.

• Supporting the tendency for private households to install water meters. The experience of Chisinau has demonstrated that the demand for water has dropped considerably once members of the general population have started installing meters.

• Reducing the level of leakages from the system.

The combined effect of all these cost savings (assuming that the investments are paid in cash) is a slightly higher level of expenditure in the beginning of the period (while the investments take place), but a significant lower level of expenditure later in the period. Approximately MDL 50 million annually can be saved over a 20 year period7.

In some cases replacing existing wastewater treatment facilities with low operational cost constructed wetlands and lagoon treatment may be an option. However, feasibility studies are necessary before this option can be developed and costed.

7 This assumes that the "easiest" cost reductions in Chisinau have been captured already by the EBRD funded Chisinau water and wastewater project. 12 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Reduced service level The Moldovan authorities accept that in certain circumstances even the existing situation may not be affordable and reduction in standards and/or services will prove necessary. Against this context the following proposals were made by the MoETD:

• Increase the current (very strict) emission limits to levels that are realistic in terms of the polluters’ ability to treat emissions (one suggestion mooted was to BOD limits from 3.5 mg/l to 15 mg/l). Such a measure would allow the Apa Canals to plan treatment facilities that aim to provide realistic levels of treatment. There is no cost reduction from this measure as it basically adjusts regulation to the possibilities of the installed technology.

• In smaller towns (less than 10,000) stop carrying out biological wastewater treatment – i.e. rely on mechanical treatment only. This reflects the existing situation (where the biological treatment facilities are in place but not working). However, the cost reductions from such a measure are only approximately MDL 5 million annually.

A further option that could be considered (although is was not proposed by the MoETD) is closing down wastewater treatment facilities in areas where (i) the state of disrepair is such that they are not providing effective treatment, and/or (ii) the environmental consequences of closing them down is not excessively damaging.

However, even providing only mechanical treatment in all towns other than Balti and Chisinau and not treatment in towns less than 10,000 population would only save MDL 20 million per annum (in addition to the MDL 5 million above).

However, even this may not be a sufficiently radical approach to affordable and healthy water and wastewater supply systems in the smaller cities. Until now the "Law on Potable Water" has the specific aim (and the standard design criteria have assumed) that urban water supply is based on centralised piped systems.

It will be necessary to critically review the characteristics of urban agglomerations (including their size) that make centralised piped systems affordable. For those urban agglomerations where such systems are not affordable, analysis is required of the cost and benefits of providing quality boreholes equipped with handpumps as an alternative to today's reliance on private shallow wells and derelict existing systems. A feasibility study will be needed to develop and cost such an approach to service level reduction.

&RQFOXVLRQV These background analyses illustrate that Moldova faces very difficult policy choices. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 13

In this section the Consultant has packaged a couple of possible scenarios that would go a long way in closing the financing gap. These have been packaged under the constraint that they must not open the two affordability gaps (affordable user charges at household level and sustainable expenditure from the public budget). There are very strict limits to user charges and public expenditure which result from the income level of Moldova both at the household and public budget level.

It is natural that a political process of assessment and further analysis of the various options is needed prior to reaching a consensus on how the financing gap should be closed. It is foreseen that such a process will take place based on the present document. This process will eventually lead to an environmental financing strategy for Moldova.

Below we present two scenarios.

In "the user pays scenario", the financing gap is basically closed through a combination of cost savings and increased financing from higher user charges, better enforcement and a higher share of cash in payments. The scenario does not assume increased public expenditure and donor assistance over and above the "normal" level of grant assistance from the past 5 years. However, in this scenario, the maintenance backlog continues to increase for 10 years and it will take more than 20 years to reduce the maintenance backlog to the level it has today. Thus the scenario does not meet the "maintaining existing service levels" targets even in a 20-year perspective.

The user pays scenario In the user pays scenario, it has been assumed that:

• The household tariffs (average) are increased to 3.8% of average household income from 3.5%

• The water payments collection rate is increased to 85% from 65%;

• As a result household payments for water and wastewater services increase from 2.3% of average income to 3.2% of average income

• Average income grows with GDP, which grows with 5% per annum;

• The tariffs for industry and budget organisations (other consumers) are set in a manner achieving a very slow reduction of cross subsidisation by which cross-subsidisation is removed over 20 years;

• The share of cash payments in revenues from other consumers is increased to 100% after 20 years up from 5% today;

• A pump replacement programme is carried out over 5 years;

• The proposals by MoETD to modestly reduce the level of ambition in relation to wastewater treatment are implemented. 14 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

• International grants at a level of 33 MDL (which is similar to what have been given in recent years in mainly technical assistance).

As mentioned above, this scenario needs to be supported by a number of flanking measures aimed at establishing an environment which is conducive for enforcement of timely payment of water bills in cash by all consumer groups. The scenario also needs to be supported by a number of institutional changes in the way maintenance programmes are being planned and carried out. Such changes would focus on establishment of systematic maintenance planning and implementation; devolution of responsibilities to the water utilities, or agents hired by them, skill development etc.

In this scenario, the backlog of maintenance continues to grow over the next 10 years, by an average of MDL 130 million per year (or approximately half of the original financing gap). Then, the combined effects of increased household incomes and water utility revenues and reduced costs imply a financing surplus and the backlog of maintenance can be reduced. Over the next 14 - 16 years the additional backlog of maintenance is removed and after more than 20 years the cumulated financing gap has been eliminated and a positive development in service level is taking place.

If this is deemed politically unacceptable additional measures are needed. One such set is illustrated in the "additional financing scenario".

The additional financing scenario The "additional financing scenario" builds upon the "user pays scenario". It adds the following measures:

• Public capital expenditure for water and wastewater is gradually increased from 0.8% to 2.0% of public expenditure after debt servicing, equivalent to an additional approximately MDL 30 million per year (growing over time with GDP growth).

• Donor assistance is attracted in form of a concessional loan with IDA like conditions and provides a total of MDL 650 million over 5 years.

This financing is spent to finance the pump replacement, network rehabilitation and metering programmes, thus allowing user charges to be spent on other "regular" maintenance programme

The phase-in period is deemed to be three to five years reflecting the time it is likely to take to agree on a policy, to implement changes in government expenditure priorities, and to identify and design the donor assistance programmes as well as the time it takes for implementation of programmes to reach their "full" level.

The "additional financing" scenario requires a number of flanking measures, notably: 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 15

• A policy process which leads to an agreement on increased emphasis on water supply and wastewater in the expenditure priorities. This may require additional analytical work to highlight the implications of continuing the current policies;

• Establishment of procedures whereby central government revenues can be used in support of water utilities, which are currently in the process of being decentralised to become a municipal responsibility;

• Negotiations with the World Bank and other donors on the future content of the programmes. In the case of the World Bank, this would require negotiations on the next Country Assistance Strategy (CAS).

• Establishment of effective project identification, formulation and identification mechanisms. The NEAP implementation unit hosted in the Ministry of Environment may form the starting point for such a mechanism.

In this scenario, the backlog of maintenance only continues to grow for 5 years and after additionally 13 to 15 years the cumulated backlog can be eliminated. Thus after 18 - 23 years an improvement in the service levels compared to the existing situation may start to be registered.

Both scenarios have been based on the assumption that the Government will implement a reform scenario which achieved 5% per annum growth rates and eliminates the structural problems in the power sector over the medium term. 16 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 17

&RXQWU\EDFNJURXQG Moldova is a small, landlocked and densely populated country situated between the western border of Ukraine and the eastern border of Romania. A map of the country indicating major population centres is provided in appendix 48.

Figure 3.1 Development diamond, Moldova As illustrated in the development diamond above, Moldova ranges similar to the World Bank group of low income countries in terms of a number of welfare indicators including per capita income, access to safe water, life expectancy and primary school enrolment. Among the countries of the former soviet union Moldova is today the poorest. It is worth to keep this in mind, when setting environmental targets.

The level of urbanisation is low, but a significant share of the population lives in the larger towns of Balti and the capital Chisinau. The low level of urbanisation is a reflection of the (continued) dominance of agriculture in the country’s economic activity (cf. chapter 5) - a dominance which was further increased

8 The boundries, denominations and any other information shown in this map (and all other maps presented in the report) do not imply any judgement on the legal status of any territory or any endorsement of acceptance of such boundaries. 18 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

with the de facto separation of the most industrialised region of Transnistria from the rest of the country. There is thus a wide discrepancy between the living conditions of Moldovans. The majority live in small towns and villages with less developed infrastructure, relying mainly on agriculture production as the source of income, and presumably depending to a relatively large extent on barter economy (as discussed in chapter 6). A minor, but still significant fraction of the population live in the larger urban centres where incomes and affordability presumably are higher, economic activity more diversified, and infrastructure more developed and better maintained.

These very different economic and living conditions for two major groups of the Moldovan society are essential issues to consider when framing an environmental financing strategy. As shown in chapter 6, affordability is lower in rural and less urbanised areas. At the same time the service level of (environmental) infrastructure is generally also lower. This is shown in chapter 11 for the case of water and wastewater.

Politically, the country has suffered from instability and vulnerability ever since independence. There is a need for a determined effort at the political and institutional level to reverse this development and for a dedicated effort to sustain the necessary reform process. In this regard it should be noted also that Moldova has made substantial reform and democratisation progress.

3ROLWLFDOFRQWH[W The country’s independence in 1991 was followed by a period of economic dis- ruption and political instability. De facto separation of Transnistria, Moldova’s most industrialised region on the East bank of the Nistru, provided an additional internal shock.

Moldova has made significant progress in democratisation since independence (for example, in 1995 it was the first of the CIS countries to become a member of the Council of Europe). However, recent years have been characterised by political instability - which is has been partly due to, but is also partly a cause of, the economic problems the country has been facing. The pro-reform Gov- ernment of Ion Sturza (which itself was only elected in March 1999) was forced to resign in November 1999 when Parliament refused to adopt laws on priva- tising the wine industry and tobacco sector.

As a result of the fall of the Government, the International Monetary Fund (IMF) suspended its program of cooperation with Moldova. Four days after the IMF’s announcement, the World Bank also suspended its lending program. A new coalition government led by Dumitru Braghis was appointed in January, but the political situation remains unstable and the commitment to pushing through difficult reforms remains uncertain. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 19

3RSXODWLRQRYHUYLHZ Population The country has a population of approximately 3.5 million inhabitants (4.3 million including Transnistria) and is the most densely populated country of the CIS. Table 3.1 shows the evolution in the population from 1995 to 1999.

Table 3.1 Population in Moldova (in 1,000)

3RSXODWLRQWRWDO QD 3RSXODWLRQH[FOXGLQJ7UDQVQLVWULD Source: Tacis Report 1999: Moldovan Economic Trends

It should be noted that these “official” figures do not take into account the large levels of “unofficial” economic migration. Much of this migration is temporary (i.e. for seasonal employment) and no statistics exists to quantify the scale of this phenomenon although unofficial estimates from the Ministry of Economy and Reform (interview source) indicate that there may be up to 200,000 economic migrants.

Settlement Patterns Moldova is a predominantly rural society and this is reflected in the pattern of settlement where 61% of the population live in towns and villages of less than 10,000 inhabitants. About 20% of the population live in the capital of Chisinau.

Table 3.2 Settlement structure, population excluding Transnistria, 1999

&DWHJRU\RIWRZQRUVHWWOHPHQWV 3RSXODWLRQ 1XPEHURI WRZQV 1XPEHU 'LVWULEXWLRQ LQKDELWDQWV ( LQKDELWDQWV ( LQKDELWDQWV ( LQKDELWDQWV ( !LQKDELWDQWV ( 7RWDO ( Source: Department of Statistic and Sociological Analysis

The table shows that although a majority lives in small towns or villages, the definition of urban population used for the present study (towns above 1,500 inhabitants) implies that 83% of the population are urban. 20 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 21

(QYLURQPHQWDOSROLF\FRQWH[W The NEAP constitutes the basis for Moldova’s environmental policy. It was framed with a clear recognition of the important critical constraints to a more active and resource-demanding environmental strategy. Consequently, the NEAP emphasises these two issues: capacity building and policy framing. It suggests only very few investment-demanding actions. In principle, the NEAP has been framed to cover the period 1996-1999. It therefore needs to be replaced now by a new programme. The Environmental Policy Division of the MoETD is currently preparing inputs for this process. To this end, the environmental financing strategy, which the present document leads up to - as well as the background analyses themselves are among the inputs.

However, it needs to be recognised that while progress has been made in the areas emphasised by the NEAP, the two critical constraints unfortunately continue to remain valid - there is a shortage of environmental finance, and institutional capacity continue to remain a limiting factor.

The analyses of the forthcoming chapters of this report indicate that the supply of environmental finance can be somewhat increased over the coming years, but that it will inevitably continue to be an important constraint in the foreseeable future. This fact further accentuates the relevance of developing specific, measurable, agreed, realistic and time-bound, so-called SMART, targets. The NEAP neither provided for SMART targets nor for operational criteria for prioritisation of (its few) investment proposals.

Today, the MoETD is the principal authority responsible for environmental policy and management. In this, the Ministry is assisted and supplemented by ministerial subordinates and other bodies as well as by the two-tier system of local government -the municipalities and the regional governments - the Zhu- dets. Recognising the institutional constraints of Moldova, it becomes very important in the future strategy also to consider carefully how to make the best use of the current institutional capacity and how to accelerate to the extent possible the institutional development at all levels. In this regard it should be recognised that substantial experience and knowledge has been build up in the MoETD, including its NEAP implementation unit, and that the development and implementation of a new strategy document in replacement of the current NEAP, would strongly benefit from utilising this resource base. This would include making it the anchoring point also for initiatives taken and implemented at local levels. 22 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

As the future strategy is likely to focus on the development of SMART targets and to emphasise more investment needs in the area of environmental services, there is also a need to recognise and address the current limited administrative capacity at local and regional levels. To implement such a strategy, it is essential to have the proper skills available as regard for example project identification, formulation and implementation as well as regards liaisons with IFIs. To this end, it could prove appropriate to make the relevant units of the MoETD an important anchoring point also in the future.

In addition to its emphasis on capacity building and policy development, the NEAP does identify two priority investment areas: rural water supply and pres- ervation of wastewater treatment and water supply infrastructure in urban areas. As shown later in this report, this priority has been reflected in for example the taking on of two major loans in the water sector (cf. chapter 8) and the high share of environmental expenditure that is allocated for water supply and water pollution reduction purposes (cf. chapter 8).

2H\HQYLURQPHQWDOSURWHFWLRQLQVWLWXWLRQV

0LQLVWU\RI(QYLURQPHQWDQG7HUULWRULDO'HYHORSPHQW The Ministry of Environment and Territorial Development (MoETD) is the main authority responsible for environmental policy and the management of all environmental issues. Its current structure and responsibilities were defined in Government Decision # 88 of February 1, 2000.

Responsibilities specifically related to environmental financing are:

• pollution control through setting pollution charges and the subsequent collection of fines and environmental charges;

• administration of the National Environmental Fund;

• co-ordination of local environmental funds; and

• attracting technical assistance funds from international donors.

MoETD funding comes directly from the state budget. This transfer covers (minimal) operating costs and there is no provision made for environmental investments - or indeed for fulfilling the strategic and other responsibilities defined above.

0R(7'6XERUGLQDWH%RGLHV Several environmental bodies operate under the direct supervision of the MoETD.

• the State Environmental Inspectorate - responsible for enforcing existing environmental legislation and monitoring pollution levels; 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 23

• the Hydrometeo Service which monitors atmospheric air quality, surface water quality and soil quality; and

• the National Institute of Ecology which carries out scientific research relating to ecology and environmental protection.

Like the MoETD, the core funding for its subordinate bodies comes from the state budget. The State Environmental Inspectorate and the Hydrometeo Serv- ice both receive state support but are also able to charge for “environmental services” (control over the engines exhaust gas, and other consultancy services in the case of the Inspectorate and sales of information in the case of the Hy- drometeo Service). These charges generate some additional income - part of which is used to cover operational costs with the remainder transferred to the state budget.

(QYLURQPHQWDOIXQFWLRQVORFDOJRYHUQPHQW Following a reorganisation in May 1999, the Republic of Moldova has two tiers of local government: municipal government (i.e. villages and towns), and Zhu- dets (or regional) government.

Table 4.1 Environmental Responsibilities of Local Government

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

Source: Based on consultations with Ministry of Economy and Reforms

Municipal Government This is the lowest level of government in Moldova and is run by an elected mayor ("Primar") who presides over a village/town council. The main environmental obligations of this level of government are the provision of environmental services (water supply, wastewater treatment and waste disposal). 24 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Regional Government There are 11 of these bodies and although they all have the same basic functions and responsibilities, their legal status does vary slightly: nine Zhudets Councils, the Municipality of Chisinau, the autonomous Territorial Unit of Ga- gauzia. Each of these territorial units has an elected council and is supported by a local administration. Each of these bodies also has a Prefect appointed by the central government whose job it is to ensure coordination of national policy and local policy.

All regional administrations have a department, which is responsible for environmental protection and the use of natural resources. Regional offices of the MoETD and regional offices of the Environmental Inspectorate operate under the supervision of these departments. In comparison to the municipalities, the Zhudets have a wider range of environmental responsibilities as is illustrated in Table 4.1 above.

Funding Local government is funded by a mixture of specific local taxation and a fixed percentage of the national taxes which are collected by the local tax offices.

7KH1DWLRQDO(QYLURQPHQWDO$FWLRQ3ODQ The basis for Moldova’s environmental policy is the National Environmental Action Plan (NEAP) which was initiated in 1994 as a part of the Environment for Europe process. The draft was completed in late 1995 and was formally approved by the Moldovan Government in June 1996.

In contrast to the earlier National Strategic Environmental Plan 1995-2020 (which constituted Moldova’s submission to the Sofia Environment of Europe Ministerial Conference) the NEAP deliberately restricted itself to providing short-term recommendations for the period 1996 to 1999. The reason for this was to focus the attention of policy makers on very specific actions which are achievable over the short term.

3ULRULW\DUHDVIRUDFWLRQ It was recognised that over the NEAP’s three-year lifetime any environmental initiative would face two major constraints: (i) the limited financial resources available for environmental investments, and (ii) the limited institutional capacity of the environmental authorities. A considerable emphasis was therefore placed on selecting actions that required limited financial and administrative input. In addition to these considerations, the NEAP placed a high emphasis on prioritising the following type of actions: 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 25

• those that have high social net benefits (in terms of public health or economic return);9 • those that focus on preventative measures; and • those that prevent irreversible environmental damage.

7KHSURSRVHGDFWLRQSODQ The NEAP proposed almost one hundred specific recommendations covering the following issues: institutional capacity; the supply of potable water; air pollution; water pollution; introducing sustainable agriculture; forest and nature protection; waste issues; and developing public awareness.

However, within these areas there was a virtually exclusive focus on policy development and capacity building. For example, in the water sector, few actual investments were proposed, and instead the emphasis was placed upon the development of a water resource strategy and a water supply investment programme. The reason for this approach is that the explicit aim of the NEAP was to take short-term measures, which will allow national authorities to make medium and long term environmental improvements.

In addition to the emphasis on capacity building and policy development measures, the NEAP did propose two areas where investment activities should be prioritised:

1. rural water supply (the first step was to be a study to identify and assess potential projects which was carried out, with the support of the World Bank, in 1997); and

2. investments to preserve wastewater treatment and water supply infrastructure in urban areas.

,PSOHPHQWDWLRQRIWKH1($3 During the period 1996 to 1999, many of the policy and institutional reforms proposed in the NEAP were implemented and major efforts to develop local capacity were undertaken10.

In addition, an NEAP implementation unit was established within the Ministry of Environment. One of the most important roles of the NEAP implementation unit was the preparation of projects building upon the NEAP recommendations that could be submitted to international donors in the hope of attracting finan-

9 Where possible the NEAP made an attempt to quantify the social and economic impact of degradation of the Moldovan environment. Water and air pollution were measured in terms of their impact on public health. Soil erosion was quantified in terms of loss of productive capacity. 10 In the first half of 2000 the Ministry of Environment plans to carry out an assessment of the degree of success that there has been in the implementation of the NEAP program and to identify the area where further actions is necessary. 26 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

cial support11. In the absence of specific, realistic and time-bound targets this may lead to an environmental project portfolio that is not cost efficient in meeting environmental objectives.

)ROORZXSWRWKH1($3 In 1998 the UNECE prepared an Environmental Performance Review (EPR). This comprehensive document provided an overview of the state of the environment and provided a list of specific recommendations. Like the NEAP, the recommendations tend to focus on short term measures to develop the policy framework and the Review has served as a de facto follow up to the NEAP.

The Moldovan NEAP has proved to be an important document because it presents a concrete agenda for developing a modern environmental policy (which did not exist before). However, the NEAP intentionally restricts itself to short term actions and does not:

• set SMART (specific, measurable, achievable, realistic and time-bound) environmental targets;

• provide criteria for selection (and phasing) of environmental investments; or

• prioritise actions between different sectors or between different actions within individual environmental sectors. This is a weakness of the NEAP but can be partially explained by the fact that very few resources were available for making environmental investments and therefore the real reason for prioritisation (allocating limited resources to priority actions) did not really arise when the NEAP was being drafted.

The NEAP should therefore be viewed as a first step in developing a more strategic action plan with SMART targets and criteria for selection of investment projects. Recognising this, the Ministry of Environment's Policy Division is in the process of developing a new strategic policy document which will review environmental priorities; propose actions to address specific environmental problems; and, specify environmental objectives to be realised over the medium and long term.

Another priority is developing environmental capacity at the local level and recently the emphasis of the NEAP Implementation Unit has been shifted to assisting local authorities in (i) developing LEAPs (Local Environmental Ac- tion Plans) and, (ii) subsequently implementing them with the support of international donor support. This shift may prove to become an important means of enhancing the capacity and the capability of local administrators and stakeholders to develop and implement environmental policies and priorities.

11 When making the decision on which projects should be prepared and submitted to donors, the most important consideration is the likely availability of donor finance (as op- posed to specific environmental targets). A list of projects is annexed to this report. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 27

This assumes however that the local capacity is above a critical level in the sense that it can actually benefit from and contribute to such a process. Further, it is essential that the NEAP Implementation Unit has the capacity to actually provide this support to the strengthening of local capacity including fulfilling the role of co-ordinator and focal point vis-à-vis the international donors in the initial phases while at the same time also fulfilling its other obligations. 28 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 29

6WUXFWXUHRIWKHHFRQRP\ The Moldovan economy is dominated by its traditional reliance on agriculture. While agricultural output, like any other sector’s output, has declined over the past decade, the sector has nevertheless been able to maintain its share of GDP: 30%. By contrast, industry’s share of GDP has declined from about 39% in 1994 and down to 29% in 1998.

The importance of industry as a source of pollution and a potential threat to environment has been significantly reduced. This can be seen as a window of opportunity providing a chance to implement and enforce realistic regulations which reduce the pollution intensity from industry. However, another implication of the industrial decline is that many existing industries are technically bankrupt and not able to pay for the municipal services provided, not to speak of being able to make investments in pollution abatement equipment. As described in chapter 12 the bulk of water charges imposed on industry is settled through non-cash payments, and the frequency of non-payments for industry is very high. In reality municipal service enterprises are subsidising a significant share of industry.

Relatively, agriculture has become the major potential source of pollution (cf chapter 10). The restructuring of agriculture with the close down of the majority of the large farms and their replacement by a number of smaller units is likely to have led to a change in the agriculture practices (cf. also chapter 10 and 12). Lack of finance implies that pesticides and fertilisers are not used to any significant extent, but the extensive and scattered livestock production is likely to lead to equally scattered and serious problems of pollution - in particular nitrates in soil, surface and groundwater. This problem is further accen- tuated by extended use of water either coming from individual shallow wells or being supplied from the water utility but insufficiently treated.

3URGXFWLRQVWUXFWXUH Moldova’s economic role in the Soviet Union’s command economy was to pro- duce raw and processed foodstuffs. Agriculture and agro-processing still represent over 40% of GDP12. The main agricultural products (and exports) are: vegetables; fruit; wine; and tobacco. Other industries are tobacco processing,

12 Agriculture itself is 30% as stated above and in the figure below. 30 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

textiles and clothing, footwear and leather, chemical production and processing of metals/minerals.

Table 5.1: Share of Moldovan GDP 1994-1998

6HFWRU $JULFXOWXUHDQGILVKLQJ ( ( ( ( ( 0DQXIDFWXULQJDQGHQHUJ\ ( ( ( ( ( 6HUYLFHVDQGFRQVWUXFWLRQ ( ( ( ( ( *'3GHYHORSPHQWLQGH[ Source: Tacis Report 1999: Moldovan Economic Trends

(PSOR\PHQW Employment has declined considerably from 1995 to 1999. Statistics13 indicate a decline in the order of 33%. However, this statistics is based on a survey of enterprises and farms with more than 20 or more employed persons. Conse- quently, part of the apparently very large decline is likely to be explained by an increasing number of small farms and small businesses. The employment in agriculture (with more than 20 employees) is actually down to almost 50% of what it was in 1995. The state administration is the only sector where employment has increased in the observed period: from 27,000 employees and up to 49,000. Annex 7 provides detailed information on the structure of employment.

Unemployment The official level of unemployment remains extremely low: 35,500 or 2% of the active population in 1998. However, the public authorities recognise that this official figure is misleading since it only represents those who have officially registered themselves as unemployed. Many more workers are actually unemployed but do not register themselves because doing so does not bring them any advantages, or because they find work in the shadow economy. Fur- ther, permanent employees may not be constantly on the payroll due to, for example, being on unpaid leave. Salary and wage arrears are prevalent.

Other sources indicate that unemployment and underemployment are serious problems. According to the pilot Labour Force Survey14 (May 1998), with a labour force of 1.7 million workers the number of unemployed people was 167,000 or 9.4 % of the population. Interviews with the Ministry of Economy and Reform indicate that, if anything, this is an underestimate of the actual situation.

The situation above provides the background for understanding household incomes and consumption possibilities described in the next chapter.

13 Department of Statistical and Sociological Analysis. 14 Source: European Expertise Centre - Economic Trends - Quarterly Issue July-September 1999 for Moldova 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 31

Source: Tacis Report 1999: Moldovan Economic Trends Figure 5.1 Structure of employment, Moldova 1995 and 1999 32 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 33

+RXVHKROGLQFRPHVDQGH[SHQGLWXUH

6DODULHV The average monthly salary increased from MDL 143 in 1995 to MDL 291 in 1999. According to the Ministry of Finance it is expected that the average monthly salary will be 330 MDL in 2000. Still this is equivalent to less than 1 USD per day15. From 1995 to 1998, real wages actually increased by around 18%, whereas a decline in the order of almost 10% could be observed from the 1998 (Q3) to 1999.

The wage difference between sectors is large as indicated in Figure 6.1 below.

Source: Tacis Report 1999: Moldovan Economic Trends Figure 6.1 Average monthly wage in different sectors, MDL The highest wages are paid in the banking and financial sector. Agriculture, education and health & social services are the lowest paid sectors.

15 The World Bank uses a couple of measures of absolute poverty. Disposable income of less than one USD per person per day is one of these indicators of absolute poverty. 34 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

+RXVHKROGLQFRPHDQGFRQVXPSWLRQ In the table below the level of household income is shown. Urban incomes are considerably higher than rural incomes and while the urban income levels have risen over the last year, rural incomes have dropped.

Table 6.1 Disposable income (MDL/month/pers)

,QGLYLGXDO,QFRPH +RXVHKROG,QFRPH 7RWDO 8UEDQ 5XUDO 7RWDO 8UEDQ 5XUDO Source: Household Budget Survey, Department of Statistic and Sociological Analysis

Consumption Details of consumption expenditure are provided in the figure below. It shows that expenditure on food and beverages is very high - 66 % of total expenditure (76% in rural areas and 55% in and urban areas)17. This level of expenditure on food and non-alcoholic beverages indicates better than many income statistics that poverty is widespread in the country side of Moldova18.

Poverty With scarce budgetary resources and a lack of administrative capacity to tackle poverty, government assistance to the poor has been limited. The poor have also been severely effected by the erosion of education, health and other public services. Poverty has been increasing since the 1998 regional crisis and according to figures from the 4th Quarter of 1998 the proportion of the population classified as "poor" had risen to 45%. A closer look at the statistics reveals that the most vulnerable section of society is young children and that poverty is more prevalent in rural areas than in urban areas19.

With regard to utility charges, the bulk of the charge billed is for heating and electricity. Moldova is entirely reliant on energy imports and in order to be able to pay for these imports the bills for these services reflect the full cost of the service. Rent is still very low and likely to continue to increase in the future. Considering the poverty, the high level of heating and power expenditure in the household budgets and the likelihood that rent will increase, it is clear that household ability to pay additional water charges is severely limited. At the same time water is a basic good and international experience indicates that water expenditure may constitute more than 10% of household expenditure in poor households. The consultant proposes to stick to the World Bank rule of thumb

16 Calculations of average household income are based on official estimations of average household size: 2.87 as a national average, 2.62 in urban areas, and 3.04 in rural areas. 17 As a natural companion to this very high expenditure on food, reports indicate that mal- nutrition is wide spread. The consumption of food per capita has decreased due to the reduction in purchasing power. According to World Bank estimates, in 1997 almost 80% of the population consumed less than Moldova’s minimum food basket. 18 The spending of more than 70% of total expenditure on food and non-alcoholic beverages is another indicator of "absolute" poverty used in World Bank publications 19 Moldova Poverty Assessment, World Bank, 1999 (p ix). 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 35

for affordability levels, which is that water and wastewater expenditure should not exceed 4% of average household incomes. The consultant notes that this will imply that a significant part of the households will be charged more than 10% of their income for water.

Source: Household Budget Survey, Department of Statistical and Sociological Analysis Figure 6.2 Breakdown of consumption expenditure Q2, 1999 in % 36 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 37

0DFURHFRQRPLFDQGSXEOLFILQDQFH RYHUYLHZ Since independence, Moldova has gone through a period of heavy economic downturn resulting in it being the poorest (in terms of GDP/capita) among the CIS countries. GDP has declined to a level of only about 30% of the 1989 level, external debts have accumulated and Moldova has large energy arrears to Rus- sia. Moldova is now classified by IFI and donor organisations as a low-income country. While this is not an attractive development per se it nevertheless opens up for the opportunity for Moldova to apply for loans on IDA terms.

0DFURHFRQRPLFLQGLFDWRUV Table 7.1 summarises the main indicators of the Moldovan Economy.

Table 7.1 Selected Indicators 1994-1999

,QGLFHVDQGUDWHV HVWLPDWHG ,QIODWLRQ &3,\HDURQ\HDU QD ( ( ( ( ( 1RPLQDO*'3 PLOOLRQ0'/ *'3JURZWK UHDOWHUPV ( ( ( ( ( (

*'3FDSLWD 0'/ ,QWHUEDQN,QWHUHVWUDWHV $QQXDODYHUDJH ( ( ( ( QD QD ([FKDQJHUDWHV0'/86' $QQXDODYHUDJH Source: Tacis Report 1999: Moldovan Economic Trends

Since independence in August 1991 the Moldovan economy has had to adjust from being a component part of the Soviet Union’s central planning system to being an economically viable entity in its own right. The country has experienced severe economic difficulties arising from the break down of trade, payments and the financial system of the Soviet Union. Further difficulties with the economy arose when the eastern (and most economically developed) part of the country declared independence in July 1992. 38 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Despite these difficulties, between 1991 and the first half of 1998, the country made notable progress in efforts to reform and stabilise its economy. A new currency, the Lei, was introduced in 1993, and monetary policy was tightened. The Lei quickly achieved stability in 1994 and was declared fully convertible in 1996. In 1997, inflation fell to an annual rate of 12%, one of the lowest rates in the CIS.

Moldova’s successes in monetary policy were not equally matched by successes in the real sector and by the end of 1998, the cumulative decline in GDP was approximately 70% below the 1991 level. This is illustrated in the figure overleaf from which it can be observed that while the average CIS country has managed to bring real growth rates up to positive values in recent years, Moldova continues to have negative growth throughout the period observed.

In 1997, Moldova began to see a small turnaround in the economy, with a re- sumption of growth (registered for the first time since independence) and a reduction of both external and internal arrears. However, since late 1998, Moldova has suffered the knock-on effects of the financial collapse in the Rus- sian Federation. The modest growth of 1997 reversed, inflation soared, the fiscal crisis deepened, and the period of sustained exchange rate stability ended. By the end of 1998, the value of the Lei had fallen by 82% against the US dollar and GDP had declined by 8.6%.

Moldova is now classified by IFI and donor organisations as a low income country. This implies, among other things, that Moldova is eligible for loans on IDA terms. With a GDP per capita of USD 410 in 1998 Moldova has one of the lowest level of GDP/capita in the CIS.

3XEOLFILQDQFH An overview of Moldova public finances is presented in Table 7.2 below.

Table 7.2 Public Finance 1994-1998, million MDL, Current prices

7RWDOUHYHQXHV 7RWDOSXEOLFH[SHQGLWXUH )LVFDOEDODQFH FDVK 5HYHQXHVLQSHUFHQWRI*'3 ( ( ( ( ([SHQGLWXUHLQSHUFHQWRI*'3 ( ( ( ( 'HILFLW FDVK DV(RI*'3 ( ( ( ( Source: Tacis Report 1999: Moldovan Economic Trends

Public finances have been characterised by a large fiscal deficit. As can be seen overleaf, on average both CEE and CIS country groups now exhibit a manage- able public sector deficit. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 41

(QYLURQPHQWDOH[SHQGLWXUHRYHUYLHZ Environmental expenditure constitutes less than 1% of GDP - and in real prices they have declined by 44% when comparing 1993 and 1998 keeping their share of GDP roughly constant in the process. The bulk of environmental expenditure is financed out of enterprises’ own funds. Environmental expenditure financed by public funds constitutes around 0.4% of total public expenditure (net of debt servicing). Recurrent expenditure for operation and maintenance dominates, and investment expenditure is very limited. Water pollution abatement is the prime outlet - accounting for almost 80% of the expenditure.

Water supply expenditure is not categorised as environmental expenditure. Water supply expenditure is equivalent to almost two and a half time the total environmental expenditure. Also in this case capital expenditure is very limited and constitutes only 3%. All operation and maintenance costs are covered through the utilities’ own funds, and thus covered through user charges, whereas (the limited) investments are financed by public funds.

Environmental projects only account for a small share of donor involvement in Moldova - between 2% and 4%. Similar to the case for public expenditure do- nor funded expenditure for water supply has been approximately four times the volume of total environmental expenditure funded by donors. Environmental issues may be integrated in other projects, but still it seems that the relatively low priority given to environmental issues by the Government of Moldova is reflected in the pattern of donor involvement.

The revenues of the Environmental Fund system are available for environmental expenditure. These revenues have increased sharply with the ear- marking of part of a tax on imported fuel. However they still constitute only 3.6 million MDL (approx. 340,000 USD).

In view of the very tight constraints on "discretionary" public spending in the short and medium term it becomes essential that scarce public budget funds are used to leverage concessional finance, including grants and loans on IDA terms to the largest extent possible. In this regard, the development of a strategy that includes carefully considered and well-motivated SMART targets combined with similarly targeted increases of allocations from the public budget could contribute to make leveraging effective. 42 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

(QYLURQPHQWDOH[SHQGLWXUH

3XEOLFEXGJHWVDQGHQWHUSULVHVRZQUHVRXUFHV Statistics are compiled by the Ministry of Economy and Reforms and cover environmental expenditure and investment in Moldova. The statistics distinguish between environmental expenditure from public budgets (state and local budgets) and enterprises’ own sources, although it should be noted that these figures do not include international sources of finance or expenditure by the Environ- mental Fund system. Using these statistics, it is possible to have an overview of the level of environmental expenditure. Water supply expenditure is not considered environmental expenditure and it has therefore not been included in this section, but deferred until section 8.2.

Environmental expenditure constituted a rather stable share of around 0.8% of GDP in the period 1995-1997. From 1997 to 1998, the share dropped slightly down to 0.7% as a result of the economic crisis that followed the economic difficulties that Russia experienced in the last half of 1998.

Figure 8.1 shows the development of domestic environmental expenditure in the period 1993-1998 taking 1993 as the base year. The figure shows that environmental expenditure in real prices has actually declined by 44%. The decline was most marked from 1993 to 1994 and again from 1997 to 1998. However, the decline was roughly in line with GDP.

The majority of the expenditure is paid from enterprises own funds, and this share has been steadily increasing from 79% in 1993 to 83% in 1998. The distribution of the expenditure is illustrated in Table 8.1. This table also disregards the water supply expenditure.

20 The OECD PAC definition as well as the Moldovan definition of environmental expenditure both exclude water supply. This expenditure, which is significant, will be dealt with in subsequent section of the report. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 43

Source: Consultants own calculations Figure 8.1 Environmental expenditure in current and constant prices 1993 - 98 Table 8.1: Environmental Expenditure by Source (MDL million)

3XEOLFEXGJHWIXQGV (QWHUSULVHUHWDLQHGHDUQLQJV 7RWDO 3XEOLF(QY([SDV(RIWRWDOSXEOLF 1$ 1$ ( ( ( ( H[SHQGLWXUHQHWRIGHEWVHUYLFLQJ

Source: Data supplied through consultations with Ministry of Economy and Reforms Note: Includes domestically funded environmental expenditure only.

Expenditure by Type Table 8.2 shows environmental expenditure broken down into current expen- of Expenditure diture (O&M), capital investment and capital repairs. The table clearly demonstrates, the largest portion of environmental expenditure is used for operation and maintenance and only a small portion is actual capital investment/repair. It should be noted that the total expenditure also includes administrative costs and some costs for environmental departments in other ministries. 44 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 8.2 Environmental Expenditure by Type (Million MDL)

&DSLWDOLQYHVWPHQW &DSLWDO5HSDLUV 2SHUDWLQJB0DLQWHQDQFH 7RWDO

Source: Data supplied through consultations with Ministry of Economy and Reforms 1) This figure includes the Ministry of Environments administrative costs as well as some costs for environmental departments in other ministries.

Expenditure The MoER also provides a breakdown of national expenditure by sector. The by Sector table shows that, in keeping with national environmental priorities, the most important sector in terms of environmental expenditure is the water sector. In 1998, 75% of expenditure applied to water pollution. This is a slight increase from previous years where water pollution accounted for about 70% of total expenditure.

For illustrative purposes Table 8.3 includes the water supply sector. As can be seen, expenditure in water supply exceeds total environmental expenditure.

Table 8.3 Environmental Expenditure by Environmental Media (MDL million)

(QYLURQPHQWDOUHFXUUHQWH[SHQGL WXUHRIZKLFK ZDWHUSROOXWLRQ VRLOSURWHFWLRQ DLUSURWHFWLRQ RWKHU 5HFXUUHQWH[SHQGLWXUHLQZDWHU VXSSO\

(QYLURQPHQWDOFDSLWDOH[SHQGLWXUH RIZKLFK ZDWHUSROOXWLRQ VRLOSURWHFWLRQ DLUSURWHFWLRQ RWKHU &DSLWDOH[SHQGLWXUHLQZDWHUVXS SO\ Source: Data supplied through consultations with Ministry of Economy and Reforms 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 45

(QYLURQPHQWDO)XQGV In Moldova there is a two tier system of extra-budgetary environmental funds or "Environmental Funds", operating at the national and local (i.e. the Zhudets) levels. The table below illustrates the development of expenditure from the environmental fund system.

The table illustrates the very sudden rise in resources available to the National Environmental Fund. This is almost entirely due to the revenues generated from recently introduced charges on imported fuel. The amount raised is substantial by Moldovan terms (the 1999 revenues of 3.6 million MDL are equivalent to approx. USD 340,000). However, in comparison to the overall requirements for environmental finance these amounts are still small.

The majority of the expenditure from the national fund is on “implementation of NEAP priority projects". There is no sectoral breakdown of expenditure available. To date projects have been supported by direct grants and the majority of projects supported are very small (average project size in 1998 was USD 5,000). However, this is likely to change in response to significantly larger revenues available.

Table 8.4 Revenues by Environmental Funds (’000 MDL)

/RFDO(QYLURQPHQWDO)XQGV 1DWLRQDO(QYLURQPHQWDO)XQG

7RWDO Source: Data supplied through consultations with Ministry of Environment. Unfortunately, data on expenditure incurred by year have not been available.

:DWHUVXSSO\H[SHQGLWXUH Water supply is a national priority for the Moldovan national authorities and is on the agenda for the Almaty Conference. Below we illustrate the domestically financed expenditure for water supply.

21 Revenues from the Chisinau Municipal Environmental Fund (the largest local fund in Moldova) are not included in the figures for 1998 or 1999. 46 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 8.5 Expenditure on Water Supply (million MDL)

2SHUDWLRQDQG0DLQWHQDQFH ,QYHVWPHQWV 7RWDO 7RWDODV(RI*'3 ( ( ( ( ( Source: Data supplied through consultations with Ministry of Economy and Reforms Note: Includes domestically funded environmental expenditure only.

O&M expenditure is funded by the utilities themselves (funded from user charges) while investments are met (mostly) from public budgets. It is clear from the figures above, that while O&M expenditure is substantial in terms of its share of GDP the level of capital expenditure is very low. A ratio of capital expenditure to recurrent expenditure of 1:35 indicates that capital expenditure is likely to be significantly below their optimal level. When taking into account the foreign funded capital expenditure the ratio will be more reasonable. Un- fortunately data on foreign financing by year is not available.

([WHUQDOVRXUFHVRIILQDQFLQJ

'HYHORSPHQW$VVLVWDQFH DOOVHFWRUV The main donors active in Moldova are the World Bank Group, the EBRD, TACIS, the UNDP and the development agencies of the United States, the Netherlands, Germany, Switzerland and Denmark. The overall trends in official aid flows to Moldova are shown in the table below.

Table 8.6: Official Development Assistance, Disbursements, 1994-99, million USD.

SDUWLDO

*UDQWV

/RDQV

7RWDO

Sources: 1994-98 (partial): DAC Statistics, Destination of Official Development Assistance and Official Aid, Table 2a.

Moldova’s dependency upon aid is illustrated by the fact that the transfer of USD 198 million in 1997 (the last year when complete figures are available) represents 10% of the country’s GDP or 25% of the entire public budget. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 47

'HYHORSPHQW$VVLVWDQFHWRWKH(QYLURQPHQWDO6HFWRU Most development agencies co-operate closely with the Government of Moldova and orient their assistance programmes towards the priorities set by the Government. Environmental protection is not a high priority for the government and as a consequence donor financing in the environmental sector in Moldova is limited. Typically, the different agencies only have a few projects targeting the environmental sector (if any).

Based on the Development Co-operation Report from the UNDP as well as consultations with the individual development assistance agencies, a list of ongoing or finalised projects in the environmental sector has been prepared (refer to Annex 6). The table below summarises the information in the list.

Table 8.7: Donor Assistance in the Environmental Sector, million USD22.

(QYLURQPHQWDO6HFWRU /RDQV *UDQWV 7RWDO

:DWHU6XSSO\6HFWRU /RDQV *UDQWV 7RWDO Source: UNDP and interview sources.

Not counting water supply, environmental expenditure represents approximately 2% of overall donor/IFI activity. However, it should also be noted that most donors emphasise the environment as a cross-cutting issue, which means that environmental actions are sometimes integrated into projects classified under other sectors. This is not reflected in the above figures.

22 The figures for loan finance represent two investment projects (the Chisinau Water Services Rehabilitation Project financed by a loan of 22.75 million USD provided by the EBRD and the Gagauzia Water Supply Project which is financed by a USD 35 million loan from the Turkish Government). The Gagauzia project deals entirely with water supply while (according to the feasibility study) 24% of the Chisinau project deals with wastewater treatment and the remainder with water supply and costs have been split accordingly. Grant support for TA related to the Chisinau project has also been split 24% to wastewater treatment and 76% for water supply. 48 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 49

)LQDQFLDOVHFWRURYHUYLHZ Prior to the Russian crisis in 1998 a combination of restrained monetary policy and institutional reforms produced a sustained reduction in inflation, a market determined exchange rate and a strong demand for domestic financial assets. During this period, dollarisation was low, Interbank money markets were developing and indirect monetary control instruments had been introduced. The spread between the one-year deposit and lending rate had narrowed to around 10% by the end of 199723. This is illustrated in the figure overleaf from which it can also be seen that Moldova has managed since maintain a spread below the average level for CIS countries, and corresponding more or less to the spread applying to the South Eastern European countries.

The Russian crisis, combined with the internal strain resultant from running a high budget deficit, reversed this progress. The demand for money has fallen, there has been a virtual collapse in the demand for domestic financial assets, and a rapid dollarisation.

There are currently 21 banks operating in Moldova which is (too) many considering the size of the (monetary) economy, although the sector remains highly concentrated with the top five banks accounting for 63% of assets and 65% of deposits. Although there have been no major collapses, the Russian crisis severely weakened the domestic banking sector. The National Bank of Moldova (NBM) is responsible for the supervision of the banking sector and has been active in promoting reforms.

The securities market in Moldova is rudimentary and dominated by a limited trading in Treasury bills.

There is not likely to be any long term debt financing (except for the administration of IFI backed credit lines) available for investments, including environmental investments in the short and medium term. Long term debt financing will require an extended period of macro-economic stabilisation, a significant consolidation of the banking sector and a development of the securities market.

23 EBRD (1999) page 249 50 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source EBRD Transition Report 1999.

Figure 9.1 Interest rate spreads 1991 - 98 (1 year lending and deposit rate) 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 51

6WDWHRIWKHHQYLURQPHQW

2YHUYLHZRINH\HQYLURQPHQWDOSUREOHPV The Ministry of Environment's and Territorial Development’s Policy Division have identified five priority areas where environmental actions are needed24. The top priority is improving water supply and wastewater treatment. This is recognised as both an environmental concern and a priority in terms of improving public health. The other priority sectors have not been ranked in terms of importance. They are:

• protecting soils from (i) erosion, and (ii) pollution; • protection of biodiversity/forestry resources; • solid waste disposal (both municipal solid waste and industrial/hazardous waste); and • air pollution from mobile sources (mainly a concern in urban areas).

:DWHUTXDOLW\LVVXHV

:DWHUUHVRXUFHV The Republic of Moldova is located in a region of insufficient precipitation and has limited water resources. Moldovan rivers are part of the Black Sea basin and consist of the Nistru and the Prut river systems25. The main groundwater reserves are located in the Nistru River's underlying aquifer. There are local and seasonal droughts. The southern part of Moldova is particularly effected by problems of water scarcity.

Recent and frequent droughts have had severe impacts on agricultural output making water management a priority concern. In addition, the over extraction of groundwater has caused water tables to drop. Large depressions in groundwater levels have formed around the cities of Balti, Chisinau, Komrat and Ka- larach, and many wells have become empty.

24 Interview source. 25 See annexed map of Moldovan river basins. 52 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

:DWHUTXDOLW\ Surface water Surface water quality is classified into 4 classes, from class I (good quality) and II (moderately polluted), to class III (polluted) and IV (very polluted). The water quality of the Nistru and Prut rivers, as well as of the lakes and reservoirs, is generally satisfactory and in line with the quality standards in force (both rivers are classified as being moderately polluted). The water from most smaller rivers and streams is classified as falling between the "polluted" and "heavily polluted" categories.

The main issues related to surface water quality are the prevalence of nitrates and ammonium. BOD concentrations in many segments of the Prut and Nistru rivers are also high (i.e. exceeding EU guidelines for drinking water abstraction). Pesticide residues and heavy metals, which were present in surface water during the early 1990’s, are now mainly prevalent in river sediments.

Groundwater Between 50-60% of the population rely on groundwater for domestic use, (more than 90% in rural areas). In terms of quality, ground water can be categorised as being either from shallow sources (30 to 40 meters) or from deep sources (more than 40 meters).

In the case of shallow sources, quality is threatened by high levels of nitrates, hydrogen sulphides and fluorides and groundwaters in approximately 60% of the country’s territory do not satisfy drinking-water requirements. The drinking water in over half of the village wells is estimated to be polluted with agricultural chemicals or their decay products. As with access to water, this problem is most highly concentrated in the south of the country, where sandy soils prevail. In some places, this type of groundwater is no longer used for irrigation mainly as a result of high salt content.

The situation is somewhat different in the case of deep sources where nitrates are less prevalent (the main pollutants are iron, hydrogen sulphides and fluorides). In a few areas of the country there are reserves of “good quality” deep groundwater. These areas are located where the Prut River converges with the Danube.

While the condition of and emissions from landfills and other waste deposits have been little, if at all, investigated, it is likely that they constitute important sources of water pollution, in particular of groundwater pollution. This is a likely result from the many inadequately designed, overloaded and insufficiently monitored landfills that exist in Moldova (cf. section 10.3)

However, when one looks at the level of discharges over recent years the basic trend is of a significant reduction in the level of emissions. In the case of industrial pollution this can be largely explained by the overall decline in Moldova's level of economic activity. In the case of agricultural pollution the reduced emission levels can be attributed to (i) the decreased use of mineral, organic fertilisers and pesticides - due to inability of farmers to afford agro- chemicals, as well as (ii) the decreased numbers of big livestock held in collective farms which were previously an important source of water pollution. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 53

6XUIDFHZDWHUSROOXWLRQ Levels of Pollution The main sources of surface water pollution are:

• agricultural run-off: particularly problematic because river valleys, slopes and river plains have been cultivated to the edge of the river banks and as a result, waters are polluted by fertilisers and pesticide residues

• industrial wastewater: sugar factories, poultry farms and dairies, wineries, electroplating shops, tanneries, chemical and textile plants are all major polluters; and

• inadequately treated domestic sewerage and wastewater.

Table 10.1 below provides an indication of the trends in the emission of main water pollutants discharged in treated wastewater. It is important to note that this table is illustrative only and at best it mainly provides an indication of development trends. The table only considers reported discharges contained in treated wastewater. This means that discharges contained in untreated wastewater and other non-reported discharges are not included.

Table 10.1 Reported discharges of pollutants from wastewater treatment plants into surface water (1993- 1998)

('HFUHDVH 9ROXPHRIGLVFKDUJHGZDWHU POQP ( %2' WKRXVDQGWRQQHV ( 2LO3URGXFWV WRQQHV ( 6XVSHQGHG6ROLGV WKRXVDQGWRQQHV ( 'U\UHVLGXH WKRXVDQGWRQQHV ( 6XOSKDWHV WKRXVDQGWRQQHV ( &KORULGHV WKRXVDQGWRQQHV ( 7RWDO3KRVSKRUXV WRQQHV ( 17RWDO WRQQHV (

1+ WRQQHV ( 1LWUDWHVWRQHV ( 1LWULWHVWRQQHV ( 3KHQRO WRQQHV (

Source: Data provided by local experts. Original source: Department of Statistic and Sociological Analysis

Decreasing emissions are obviously to be welcomed in strictly environmental terms. But there are a number of factors that imply that water pollution is still a serious issue in Moldova. This includes the following: the damage caused by previous emissions; the advanced stage of disrepair of many wastewater facilities; the increased level of diffuse pollution from privately owned livestock; and unauthorised solid wastes landfills along the small rivers. 54 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

4XDOLW\RIGULQNLQJZDWHU Polluted drinking water is one of the most important environmental and public health problems currently facing Moldova and according to official data a marked deterioration in the quality of drinking water has been reported over the last ten years. According to World Bank estimates, only 56% of the population have access to safe water26.

The towns Chisinau and Balti benefit from pre-treated water from the Nistru River and all inhabitants have good quality (complying with the existing standards) potable water. However, poor maintenance of the water distribution network means that secondary bacteriological pollution can periodically occur in isolated areas of towns.

In smaller towns the percentage of the population with access to good quality water decreases to approximately 60% and an increasing number of users rely on shallow wells for access to water. In many small towns the levels of pollution can be significantly above the allowable limits/concentrations (iron, fluo- ride, nitrates, CH4, H2S).

Most villages are not connected to any centralised / piped water supply. If there is any piped water in a village, the source is usually bore holes or springs.

Economic costs of The Moldovan NEAP calculated the social and economic impact of poor poor drinking water drinking water quality. Using available data it was estimated that polluted quality drinking water would lead to between 950 and 1,850 premature deaths per annum and between 2 and 4 million days of illness. This information was used to make a rough calculation of the monetary cost of the pollution which ranged between USD 66 and USD 117 million per year (equivalent to 5% - 10% of GDP).

This analysis is useful as it provides an indication of the cost effectiveness of taking measures to improve water quality (although other factors, that also increase mortality risks should also be considered before drawing final conclusions based upon these figures).

8UEDQZDWHUDQGZDVWHZDWHULQIUDVWUXFWXUH Sewage systems (collection and treatment) as well as central water supply systems have for long suffered from the implications of the financial strain on the Moldovan economy. Consequently, maintenance levels have for years been much lower than required to maintain the state of the systems. Therefore, the performance of the systems has been reduced.

Furthermore, the energy supply problems of Moldova have severely affected these systems implying among other things that in spite of a number of sewage plants having been designed for mechanical and biological treatment most of

26 Moldova at a Glance: http://www.worldbank.org/data/countrydata/countrydata.html 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 55

them today only undertake mechanical treatment. Furthermore, the lack of energy also implies that disruptions of water supply occur frequently.

All of the above implies that the service provided by the systems is reduced year by year. More and more pipes leak, and the holes involve risks of bacteriological infections, sewage is not treated properly and pre-treatment of raw water becomes insufficient.

6XPPDU\RIH[LVWLQJVLWXDWLRQIRUZDWHUVXSSO\DQG ZDVWHZDWHUVHUYLFHV In the table below, we summarise information about the existing situation in relation to the parameters, which will be used to define environmental targets for the urban water sector27, viz.:

• potable water quality; • regularity of water supply; • water supply service coverage of the population; • share of population connected to public sewers; • quality of discharged wastewater

27 The "urban" sector is defined here to include villages with a population of more than 1,500 inhabitants. Table 10.2: Overview of existing situation: Water supply quality

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6PDOOWRZQV 6RPHWRZQVRIWKLVFDWHJRU\ PDLQO\WKHRQHVZLWKZLWKGUDZDORIZDWHUIURPWKHULYHUV KDYHWUHDWPHQWSODQWVFDSDEOHRISURYLGLQJ WR JRRGTXDOLW\ZDWHU7KHUHVWRIWRZQV * DUHVXSSOLHGZLWKZDWHUFRQWDLQLQJVHYHUDOLQJUHGLHQWVH[FHHGLQJWKHDOORZDEOHOLP LWVFRQFHQWUDWLRQV ,URQ)OXRULGH1LWUDWHV7'6&++6HWF )RUDOOWRZQVWKHUHDUHIUHTXHQWHQHUJ\VXSSO\GLVUXSWLRQVZKLFK UDLVHVWKHLVVXHRISRWHQWLDOVHFRQGDU\SROOXWLRQLQWKHQHWZRUNGXULQJSHULRGVZLWKRXWSUHVVXUH

9LOODJHVWR 2QO\*RIWKHSRSXODWLRQZLWKLQWKLVFDWHJRU\KDYHDFFHVVWRVXSSO\IURPHLWKHUFHQWUDOV\VWHPVRUORFDOZHOOVZKLFKDUHFDSDEOHRI SURYLGLQJDJRRGTXDOLW\ZDWHU WKH*PDLQO\LQFOXGHVYLOODJHVWKDWDUHORFDWHGLQ1LVWUX5LYHU%DVLQ

Source: Consultant’s estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development.

0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 57 58 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 10.3: Overview of existing situation: Regularity of supply

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Source: Consultant’s estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development. Table 10.4 Overview of the existing situation: Water supply service coverage

$JJORPHUDWLRQ 'HVFULSWLRQRIWKHH[LVWLQJVLWXDWLRQ 0DMRU6HWWOHPHQWV 2QO\WKHSHULSKHU\RIWKHWRZQVIURPWKHFDWHJRU\ LQSDUWLFXODUWKRVHUHFHQWO\DGPLQLVWUDWLYHO\DQQH[HGWRWKHWRZQ GRQRWKDYH WR *SLSHGZDWHUVXSSO\FRYHUDJHV\VWHP7KLVLVDYHU\PLQRUSDUW &KLVLQDXDQG%DOWL 7RZQVWR 7KHELJJHVWWRZQVRIWKHFDWHJRU\ &DKXO8QJKHQL KDYH*RIWKHDUHDFRYHUHGE\FHQWUDOLVHGZDWHUVXSSO\,QWKHODUJHUWRZQV *RISRSXODWLRQKDYHSLSHGZDWHUV\VWHPDQGKRXVHKROGFRQQHFWLRQV,QWRZQVZLWKOHVVWKDQLQKDELWDQWVRQO\* KDYHKRXVHKROGFRQQHFWLRQV7KHUHPDLQLQJLQKDELWDQWVXVHZDWHUIURPVWUHHWWDSV 6PDOOWRZQV *RISRSXODWLRQDUHFRYHUHGE\FHQWUDOVXSSO\EXWLQWKHVPDOOHUWRZQVVWUHHWWDSV QRWKRXVHKROGFRQQHFWLRQV DUHGRPLQDQW WR RXWVLGHWKHFRUHRIWKHWRZQ 9LOODJHVOHVVWKDQ 7KHPDMRUSDUWRIWKHSRSXODWLRQLQYLOODJHVKDVZDWHUIURPVKDOORZZHOOV$SSUR[LPDWHO\*RIWKHYLOODJHVKDYHVRPHIRUPRIFHQWUDO VXSSO\2IWHQRQO\DYHU\OLPLWHGVKDUHRISRSXODWLRQLQWKHYLOODJHVLVFRQQHFWHGDQGRQDYHUDJH*RIWKHSRSXODWLRQLQWKHYLO ODJHVDUHFRQQHFWHGWRFHQWUDOVXSSO\2IWKHWRWDOSRSXODWLRQLQYLOODJHVRQO\*LVVXSSOLHGIURPFHQWUDOV\VWHPV7KHUHVWUHO\RQ ZHOOV Source: Consultant’s estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development.

0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 59 60 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 10.5 Overview of existing situation: Wastewater collection coverage

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Source: Consultant’s estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development. Table 10.6 Overview of existing situation: Wastewater treatment

$JJORPHUDWLRQ 'HVFULSWLRQRIH[LVWLQJVLWXDWLRQ 0DMRU6HWWOHPHQWVWR 0HFKDQLFDOELRORJLFDOWUHDWPHQWIRU*FROOHFWHGZDVWHZDWHU 7RZQVWR 7KH::73SODQWVZHUHGHVLJQHGIRUPHFKDQLFDOELRORJLFDO 0% WUHDWPHQWIRU*RIFROOHFWHGZDVWHZDWHU1RZWKH\DUHZRUNLQJ RQQRWPRUHWKDQ*HIILFLHQF\ FXWRIIRIHQHUJ\VXSSO\HIIHFWLYHO\PHDQVWKDWWKH\DUHSURYLGLQJPHFKDQLFDOWUHDWPHQWRQO\

6PDOOWRZQV 7KH::73SODQWVZHUHGHVLJQHGIRUPHFKDQLFDOELRORJLFDO 0% WUHDWPHQWIRU*RIFROOHFWHGZDVWHZDWHU1RZWKH\DUHZRUNLQJ WR RQQRWPRUHWKDQ*HIILFLHQF\ FXWRIIRIHQHUJ\VXSSO\HIIHFWLYHO\PHDQVWKDWWKH\DUHSURYLGLQJPHFKDQLFDOWUHDWPHQWRQO\ 9LOODJHVOHVVWKDQ *HQHUDOO\QRWUHDWPHQW Source: Consultant’s estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development.

0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 61 62 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The two tables below summarise the existing service level for water supply and wastewater.

Table 10.7 Summary of existing situation for water supply

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7RWDO È Note: Table 13.1 on page 95 page provides town specific information. 1 Water demand among consumers connect to central water supply 2 4 of these towns do not have any central piped water supply 3 158 of these towns do not have any central piped water supply

The data illustrate that the two biggest towns Chisinau and Balti dominate central piped water supply having 62% of all consumers connected to central piped water supply and a higher share of total water consumed.

Table 10.8 Summary of existing situation for wastewater collection and treatment

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Note: Table 13.5 on page 98 provides town specific information. 1 6 of these towns do not have any central sewerage collection 2 504of these towns do not have any central sewerage collection

Similar to what was noted for water supply Chisinau and Balti dominate central sewerage with 74% of all consumers connected to central sewerage. At the same time the table illustrates that only a very small share of the small towns have centralised sewerage for the population. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 63

6ROLG ZDVWH

0XQLFLSDO VROLG :DVWH At present only rough estimates are available for the generation of solid waste, and these indicate a total volume of between 4 and 5 million tonnes annually. Owing to the absence of adequate treatment technologies, the volume of accumulated wastes is growing steadily.

Most domestic solid waste ends up in landfills and there are 47 legal landfills in Moldova, usually located within 8-10 km of each major town or district centre. Only two of these landfills meet national (Soviet based) standards. At least 30% of the landfills are currently exceeding capacity, but further construction of new landfills has been stopped due to the economic crisis. Considerable additional investments are needed to build new landfills which can replace the overloaded ones and to close existing landfills once their lifetime has been reached28.

At older sites, overfilled sites and at illegal dumping locations, there are likely to be industrial wastes mixed with municipal waste, and an unknown degree of contamination of the surface water and groundwater.

The lack of information on waste disposal makes it impossible to draw conclusions on the extent to which these sites represent a major health/ecological hazard. However, the available evidence indicates that problems in dealing with solid waste are serious and as a result a negative impact on health and ecological conditions can be assumed. This is the reason why this is considered as a priority area by the national authorities.

,QGXVWULDO DQG KD]DUGRXV ZDVWH While there is no official data on the production and storage of industrial wastes the economic decline in Moldova means that the annual generation of industrial and hazardous waste has decreased. However, the volume of accumulated wastes is growing steadily.

According to the authorities, no organised hazardous waste disposal sites exist in the country. The production of hazardous waste was in the order of 11,000 tons in 1992, of which 235 tons was considered highly toxic. More than 15,000 tons of highly toxic waste is in stock, a large part of which are pesticide residues. The rest of the hazardous waste is mainly oils, metal hydroxides, formaldehyde, and cya- nide waste.

28 Example: The closed landfill site for Chisinau at Singera is not capped by an impermeable soil layer and leacheate continues to leak into the river in the valley bottom. The risk of contamination of the groundwater is considered low as the site is underlain by clays, but groundwater monitoring wells have not been installed to verify the situation. A permanent closure plan including capping, collection of gases and treatment of leacheates has been prepared but implementation has not been carried out due to the high capital costs. 64 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

As with municipal waste, there are concerns over illegal and uncontrolled dumping of industrial wastes. The situation is escalating due to rising costs for fuel, and the consequent incentive to shorten haulage distances by illegally dumping wastes before reaching authorised landfills.

$LU TXDOLW\ LVVXHV Stationary Sources As with water emissions, the economic decline in Moldova has meant that since the early 1990’s the emission of main air pollutants has decreased dramatically. Industrial decline has particularly reduced the levels of pollution from stationary sources with the main sectors responsible for emissions being the energy and heat generation sector (85% of total emissions)29.

Only one third of registered stationary sources are equipped with dust collectors and none with flue gas desulphurization (FGD) or denitrification (DeNOx) systems. No data exists on whether or not the abatement equipment is operated effi- ciently. If they are not being correctly operated (which is highly possible) then particulate emissions are likely to be significantly higher than recorded in the official statistics.

Mobile Sources Emissions from vehicle transport are high per unit of fuel consumption due to the high average age of the vehicles, low fuel efficiency, no emission control equipment, and poor maintenance. In contrast to emissions from stationary sources, emissions from mobile sources have increased over recent years and at present they represent the major emission source for certain pollutants (e.g. NOx emissions from road vehicles alone equal those from all stationary sources combined). These emissions are particularly concentrated in urban areas where high population densities compound the adverse health effects.

Due mainly to the industrial decline, air quality in Moldova is not a major environmental problem today. However, tackling urban emissions from mobile sources is the one priority area identified by the Ministry of Environment with regard to air pollution because this is the area where air quality is perceived as being detrimen- tal to human health. /DQG PDQDJHPHQW The Moldovan economy is based upon agriculture and therefore a sustainable use of land resources is a national priority - both in terms of environmental protection and in terms economic development. Nevertheless, soil erosion, degradation and pollution are all major problems in Moldova. Addressing these issues is consequently a priority of national environmental policy.

29 The single most polluting source is the Dnestrovsc power plant located on the Nistru left bank, which emits more pollution than all other stationary sources combined (54% in term of weight). 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 65

6RLO HURVLRQ DQG GHJUDGDWLRQ About 700,000 ha, or almost 30% of total agricultural land, suffers from some form of erosion. More than 310,000 ha are considered eroded to a medium to high degree. The eroded area grows by 0.86% a year and the annual loss of fertile soil particles amounts to about 22 million tonnes. Orchards, vineyards and arable land are the most eroded. A map illustrating the distribution of Moldova’s soil resources is annexed to the report.

The steady erosion and degradation of soil has substantial implications for the long term sustainability of land resources. The regenerative capacity of soil on slopes is very low, suggesting that some of the soil resources in Moldova should be considered as "non-renewable resources."

&DXVHV RI HURVLRQ DQG GHJUDGDWLRQ Soil erosion and degradation in Moldova can be attributed to a combination of natural, policy/institutional, and land use management factors:

Natural Factors The extent and potential for erosion caused by water is serious due to the hilly character of the countryside and occasional torrential summer rains.

Policy/Institutional The most important policy and institutional factors are: the lack of access to soil Factors conservation technology; the absence of incentives for farms and farm managers to conserve land resources; and an ineffective system of monitoring and enforcement.

Land Management There are many land management issues which contribute to the current problems Factors with soil degradation. These include:

• inappropriate match between crop, slope, and soil type; • inappropriate use of chemicals, irrigation systems, and machinery; • large-scale conversion of hilly pasture and meadows to annual crops; • cultivation of large fields with no attention to slope distribution • intensive tillage systems; and • a lack of attention to land cover during heavy storms.

7KH HFRQRPLF FRVWV RI VRLO HURVLRQ The Moldovan NEAP made an attempt to quantify the economic damage caused by soil erosion and degradation. The estimated levels of erosion were translated in to losses in potential crop yields, and using this technique, the annual loss due to soil erosion was estimated at between USD 45 and 55 million. The present value of the productivity loss was then discounted into perpetuity at 10%, providing an estimate of USD 450 to 550 million for the potential benefits for effective soil conservation. 66 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

1DWXUH IRUHVWU\ DQG ELRGLYHUVLW\ Protected areas and forest territory have increased over the last 20-30 years. How- ever, the quality of forest ecosystems is declining, most wetlands have been drained, river ecosystems are threatened, and an increasing number of species are endangered.

3URWHFWHG DUHDV As of 1993, about 56,000 ha of land was under State Protective Status, constituting 1.7 % of the total territory of Moldova. Nevertheless, protected areas are substantially less than in most countries with similar or higher population densities. The total protected area is considered too small to ensure a long-term ecological balance with regard to land use (i.e. slope stabilisation, watershed viability, ecosys- tem viability, wildlife habitats, recreational uses). There are proposals for increasing the total protected areas to about 3.3 % of total land territory and identification of areas for protection is ongoing.

)RUHVW UHVRXUFHV Forest cover plays an important ecological function in Moldova in terms of watershed protection and soil conservation. Consequently, the continuous degradation of the forest cover and destruction of forest Balti have significantly contributed to making the climate more arid, increasing erosion and intensifying the landslide process.

At present the forest cover in Moldova is 8.5% of national territory. Recognising the importance of this issue there is a plan to expand forest areas to reach 13% cover - although this is still less than in most comparable countries. However, such ambitious plans must be viewed as somewhat optimistic since current levels of planting are only one-third of the levels that existed before 1990 (due to lack of resources and availability of land for planting).

The poor quality of the forests is attributed to marginal location of forest reserves, poor management practices, and pollution. Additional factors affecting forest resources are the fuel crisis (difficult economic conditions increase the incentives for illicit logging for fuel purposes) and the degradation of forest lands due to usage as pasture.

Forest resources are generally of poor and deteriorating quality. Only 25-30% of forests are currently suitable for exploitation. The need to rehabilitate forests through improved management practices is considered vital to ensure the continued viability of these ecosystems. It has been estimated that degradation of the forests is at a critical stage, and that the situation will become irreversible within 10- 15 years. However, because of severe budgetary constraints, remediation efforts have been curtailed.

30 See annexed maps on forestry and bio-diversity. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 67

(QYLURQPHQWDO WDUJHWV Current revenues do Chapter 12 describes in more detail the current expenditure and revenue levels of not cover current the water and wastewater facilities. It is clear from these analyses that current costs revenue levels are not sufficient to even provide for the full maintenance of the current infrastructure. As an overall observation, revenues cover operation costs and only a fraction of maintenance costs. As a result, service levels are steadily deteriorating although the speed of deterioration is likely to exhibit substantial variations between plants.

Constraints on addi- Household incomes are fairly low, public budgets are tight and industry is gener- tional revenues ally in a very difficult financial situation today. Thus, while one can envisage a situation where revenues are somewhat increased as a result of increased allocations from the public budgets and an increase in the charges collected from households and industry, the further revenues to be generated this way are limited.

Focus on "urban water" The project advisory committee has suggested that the project focuses on "urban" water supply and wastewater. However, "urban" has been defined to cover all agglomerations with more than 1,500 inhabitants. Thus 80% of the population is covered.

"Maintain existing The committee has formulated the overall environmental target for urban water situation" supply and wastewater as "maintaining the existing situation". We have worked with the advisory committee to define more precisely, what "maintaining the existing situation means". It has been defined as described below. No new (green field) investments are foreseen, and no major rehabilitation works are foreseen. However, a "full-scale" maintenance programme is foreseen. In this document this "full-scale" maintenance is reflected both in the definition of targets (aimed at maintaining service levels) and in the calculation of costs. There are three dimensions to this formulation of the target as it implies that:

• Distribution and collection networks. The distribution and collection networks will be maintained. Specifically, it is assumed that a share equivalent to 1/n, where n is lifetime, is replaced every year. With a highly dilapidated 68 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

system this will imply significant service level improvements in the early years, when the "worst" sections of networks are replaced. However, since only 1/n is replaced annually, the network average age will remain unchanged.

• Water and wastewater plants. The target assumes that the plants will come to operate according to the designed technologies, i.e. that plants that were designed for mechanical and biological treatment will also come to perform such treatment in spite of the fact that they today only provide mechanical treatment. Drinking water quality will improve to design levels as a result of among other things the implicit assumption in the target that the plants purchase and use the chemicals needed. However, as was the case for the networks, the average age of plants is assumed to be unchanged. Thus service levels may be less than for new plants of the same type.

60$57 WDUJHWV Environmental targets should in general be SMART - specific, measurable, accepted, realistic and time-bound. The targets for Moldova have been formulated with the target year 2000, as the targets are mainly a continuation of the current situation. Below we present a further specification of the targets outlined above.

Targets have been formulated for four groups of urban areas (by size)31:

• Urban areas with 1,500-10,000 inhabitants;

• Urban areas with 10,000-25,000 inhabitants;

• Urban areas with 25,000-50,000 inhabitants; and

• Urban areas with more than 50,000 inhabitants.

Given the demographics of the country and the limited number of larger urban areas, few urban areas qualify for inclusion in the high population stratas. Moldova has 8 cities with more than 25,000 inhabitants. Specific targets for a limited number of main cities are formulated below, while targets for villages with 1,500- 10,000 and towns with 10,000-25,000 in general have been formulated as average target values for each group of agglomeration.

6XPPDU\ RI WKH VHOHFWHG WDUJHWV The specific targets are presented below.

31 The choice of size groups has been determined by available data. While it would have been preferable to match the size groups of the EU Urban Wastewater Directive this would have been very difficult. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 69

:DWHU VXSSO\ For water supply targets have been formulated in terms of water quality at the tap, service level and service coverage.

Service coverage defines the percentage of the population which is served by centralised water supply defined to include in-house taps as well as outdoor pumps/wells within a range of 200 meters from the household The estimate of current service coverage for individual cities is based on "expert" estimates.

Water quality targets are in principle formulated as the percentage of water quality tests which are in non-compliance with sanitary norms and standards. Unfortu- nately data quality is very poor (lack of reliable hygienic tests). Therefore expert estimates have been made.

Service level should be defined as the share of the served population which has 24 hours water supply. However, power cuts are a key reason for irregular supply, and the regularity in water supply is likely to change in parallel to change in the power supply situation. Instead, we have assessed whether the installed water production capacity is sufficient to provide consumers with a reasonable amount of water if and when regular power supply returns to the country.

Table 11.1 Water supply service coverage for 2020. Share of population.

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$OOÃYLOODJHV È ÃÃÈ QRWÃUHTXLUHG 1 6 of the remaining 10 towns in this group have centralised piped water and the connection rate is 50% in these towns 70 Hyqh)Ã7hpxt qÃ6hyrÃs ÃurÃ@v rhyÃAvhpvtÃT hrt

2 366 of the 524 towns in this group have centralised piped water and the connection rate in these towns is 13% on average

It is seen that no expansion of the coverage is assumed in any city. As noted on page 103, the population of Moldova is only expected to grow by 62,000 people or 1.7% over the 20-year period. Urban areas overall are not assumed to experience a significant increase in the population. If specific cities experience a positive population growth, an unchanged coverage ratio for these cities will imply a need for expansion of water supply systems. At this stage it has been assumed that none of the specified cities will experience such a population growth.

Table 11.2 Target for water quality: Share of population receiving acceptable tap water quality

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For towns with central piped water supply, we basically only know that not all those connected receive quality water all of the town. The situation is worse in smaller cities with frequent and long cut-offs in supply. For the smallest group of towns, we also know that a share of the population, approximately 30%, have access to quality water from wells. This share has been added to those who receive piped water supply in small towns. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 71

Table 11.3 Service level target (proxied by production)

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The table illustrates that almost all the major towns (above 25,000 inhabitants) have the capacity to supply its citizens with tap water in volumes which are typical consumption volumes for household connections. In fact only Komrat and Orgeev fall below this capacity. This notwithstanding there is likely to a major task in most cities to reduces UFW, in particular network losses and losses inside resi- dential housing blocks. Thus targeted and systematic maintenance may contribute significantly to achieve service level improvements.

The smaller cities face the situation that regular power cut-offs imply that water supply intermittent. At the same time, generally only the core of the city has household connections and a share of the population served by street posts. In this light production capacities of approximately 100 lcd do not seem unreasonable, although the may require careful water use at the big consumers (for example the school, the health clinic, the administration building).

The targets do not assume that production capacity shall increase in these cities. In other words, while the strategy assumes that water delivery schedules become more regular and pre-announced, it is not assumed that capacity will be expanded to meet larger demand.

32 The very very high level of water production in Edinets does not seem credible. However, we have not been able to get better data on water production in Edinets. 72 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

:DVWHZDWHU Specific targets for wastewater have been formulated in terms of:

• The quality of discharged wastewater as measured by treatment technology applied (and implicit BOD and SS emissions); and

• Service coverage i.e. the percentage of the population connected to the cen- tralized sewerage system.

The targets formulated in terms of BOD and SS concentrations were transformed into technological standards, cf. Table 10.4. The concentrations of BOD and SS resulting from the standard scheme of mechanical-biological treatment were selected as target values.

Table 11.4 and Table 11.5 present the established targets. Only for wastewater treatment the specified target requires investments. The existing treatment plants in the towns less than 50,000 inhabitants will need renovation. For the cost calculations it has been assumed that the renovation will be implemented over a couple of years, so the targets will be achieved in 2002.

Table 11.4 Targets for Wastewater Treatment

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Notes: M - mechanical treatment, MB - mechanical-biological treatment; 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 73

Table 11.5 Wastewater collection service coverage. Share of population.

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As regards the wastewater collection and treatment, the target imply that collection rates will be maintained and that wastewater treatment will be re-establish to the design level. This implies that the - many - MB plants that today only perform mechanical treatment will perform mechanical and biological treatment. This has implications for inter alia operating costs and a need for constant power supply. 74 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 75

:DWHU VHUYLFHV LQ 0ROGRYD Urban wastewater treatment and water supply (henceforth named "urban water") is the focus of the analyses of actions to achieve targets and the costing hereof presented in the forthcoming sections. This section provides a background description of the current urban water physical and institutional infrastructure.

Urban water is defined as municipal water supply and wastewater treatment from the point of water treatment and to the point of outlet from the municipal treatment plant. The consultant and the advisory committee have discussed whether to include water resource issues. In view of the overall target being "to maintain the existing situation" and the complexity of the issues at hand, it has been agreed with the advisory committee to not include water resource issues.

There are 51 individual water companies, Apa-Canals, in Moldova. Among those, the Apa-Canal Chisinau (ACC) is by far the largest. This is illustrated by the fact that ACC collects about 65% of all water revenues that are collected in Moldova and accounts for a bit less than 60% of the expenditure. By comparison, about 50% of the population connected to central water supply live in Chisinau. We have therefore put particular emphasis on describing ACC in the text and in particular in the model analyses.

The government aims to restructure the entire "urban water" sector. It is planned that all water utilities will be transformed into JSCs and placed under the responsibility of the Zhudets with the long term objective of privatisation. Further, the restructuring should aim to reduce the number of utilities to one per Zhudet, of which there are 11 in total33. This is a very substantial reduction in the number of companies.

A brief analysis of the current tariffs indicates that most bills tend to be in the affordable range, i.e. to constitute less than 4% of average household incomes, although the analysis also shows that the bills are in excess of this fraction in some cases as well.

In principle, the Apa-Canals are entitled to set the tariffs according to a principle of full cost recovery. They are not entitled to subsidies from the public budgets and all current costs must thus be covered through the revenues. However, investments are to be financed from public funds.

33 Including the Municipality of Chisinau and the autonomous Territorial Unit of Gagauzia 76 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The tariffs must be approved by the municipalities before they can take effect. In reality, concerns over affordability and the public’s right to access to water over- rule the right of water utilities to charge on a full cost recovery basis. This is the major reason for the lack of revenue to cover maintenance costs. Occurring deficits are normally covered by the taking on of debt in terms of postponing payments to suppliers of electricity and chemicals and of salaries

7KH OHJDO IUDPHZRUN Framework Legisla- The main framework legislation governing the water sector in Moldova is the 1993 tion Water Code. This Code describes all the aspects of water protection and water use and the main contents are:

• water resources are defined as being exclusively state property;

• responsibilities are set out for water abstraction and for preventing water pollution, (including accidental pollution);

• responsibilities are set out for water monitoring (the State);

• it stipulates that, as a basic principle, water use should be paid for which in practical terms means the levying of extraction charges34; and

• a system of permitting (by water resource management bodies, sanitary and environmental protection bodies) is set out for every activity making use of water.

Law on Potable In autumn 1999, the Moldovan Parliament passed the Law on Potable Water. The Water main focus of the law was to re-assign responsibilities in the field of potable water supply and the key provisions were:

• a presentation of the principles of State policy in the field of potable water supply which i.a. are: (i) the State is responsible for good quality water supply; (ii) existing needs for potable water should be (mainly) met by developing centralised water supply systems 35 ; (iii) the principle of the consumer paying the full cost of services provided should be developed.

34 However, this principle did not reflect the “Dublin and Copenhagen Principle” of water as an economic and social good (which stipulates that water must be paid for at its value in alternative uses) and agricultural water was heavily subsidised until 1999. This subsidy was removed because the government could no longer afford it and in many cases the inability of farmers to meet the increased charges has resulted in a drop in agricultural production. 35 This is a general statement of intent an follows from a 1991 study that investigated the possibility of providing a centralised service for the whole of Moldova (but which was never developed to a lack of resources. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 77

• allocates institutional responsibilities for potable water supply, including the different competences of central and local/regional governments;

• states that the potable water supply systems are not a subject of privatisation;

• defines the sources of financing for the sector: (i) user charges; (ii) state and local budgets; (iii) investor funds allocated for the development of the system; (iv) donor funds and IFI credits; and (v) other sources.

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2YHUYLHZ RI LQVWLWXWLRQDO UHVSRQVLELOLWLHV A summary of which bodies are responsible for different aspects of water supply and treatment is provided in the table below:

Table 12.1 Responsibilities Relating to Municipal Water and Wastewater, 1999

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It should be noted that the above table provides a simplified and time specific picture since the legal/institutional framework in which the utilities operate is rapidly changing and the water utilities are obliged to carry out extensive reporting and co-ordination with a large number of public authorities. Such a situation means that exact lines of responsibility can be unclear and considering the importance of institutional issues on eventual financing proposals, the specific responsibilities of the main actors are described in some more detail below. 78 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

7KH ZDWHU XWLOLWLHV There are fifty-one individual Apa-Canals; one for each municipality with a water installation. The Apa-Canals posses water supply, wastewater collection and wastewater treatment plants except a few that has no treatment facilities only collection of wastewater.

The key responsibilities of the utilities are the following: to operate and maintain the existing water facilities; to formulate tariff proposals; to formulate plans for investments; and to collect tariff revenues.

Municipal Water The assets of Apa-Canals are owned by state but they operate as independent enti- (except Chisinau) ties. Most importantly for the purposes of this study, the Apa-Canals are considered to be financially independent (i.e. they are dependent on their own revenues in order to operate, although the political control over the tariff setting process means that they are not, in reality, fully financially independent). The sources of these revenues are the charges made to water consumers.

Municipal Water One exception to this rule is the Apa-Canal Chisinau (ACC) which has been es- (Chisinau) tablished as a Joint Stock Company (JSC), although all the shares (100%) belong to the Ministry of Privatisation of Moldova. This organisation structure was a pre- condition of the ACC receiving EBRD support.

Proposed As the ACC is by far the largest water utility in Moldova, its transformation into a Restructuring JSC sets an important precedent and a proposal is currently being drafted by the Ministry of Environment and Territorial Development and Territorial Develop- ment. This proposal recommends a restructuring of the water sector, in order to

• transform the all water utilities into Joint Stock Companies (JSCs) • place these JSCs under the responsibility of the Zhudets (in the short term), with the long term objective of privatisation; and • reduce the total number of utilities (i.e. one per Zhudets).

It is intended to submit the proposal for governmental consideration in Spring 2000.

0XQLFLSDOLWLHV The key responsibilities of the municipalities are:

• Initial approval of tariff increases proposed by the utility. The municipality also consider the implication for provision of subsidies for selected groups of the population. They decide whether the subsidy should be included into the tariff and thus divided between the other customers or if it will be paid from municipal budget sources.

• Approval of investment plans proposed by the utility. The Apa-Canals are always the initiator for project applications), but the municipalities have to approve all major repairs and capital investments. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 79

• Securing finance for investments (either through own resources or from central government). Municipalities are formally allowed to take loans themselves without applying for permission to the upper administrative levels (Zhudets or National), although in practice this has not yet occurred to support water investments.

=KXGHWV The main functions of the Zhudets with regard to the water sector are final approval of tariff levels.

The role may be significantly enhanced if current plans to transfer ownership of the assets to Zhudets level are acted upon.

&HQWUDO *RYHUQPHQW Ministry of Envi- Existing as the Ministry of Territorial Development until a merger with the Minis- ronment and Territo- try of Environment in later 1999, this is the “line” Ministry, responsible for water rial Development services on a national level. Its main role is the development of a suitable legal framework for Moldova's water policy. The Ministry is also involved in preparation of the national water investment program - i.e. it receives project proposals from Apa-Canals, evaluates them and decides which ones should be recommended for financing out of the national budget.

Ministry of Finance The MoF is responsible for the final decisions on budget proposals by line ministries. In line with its basic responsibility for the State Budget, Government contributions to capital expenditure (including the taking on of international loans) are approved by the MoF.

)LQDQFLQJ RI ZDWHU XWLOLWLHV The water utilities no longer receive direct operating subsidies from the state and are therefore dependent upon revenues generated from tariffs in order to raise revenues. The revenue situation varies from utility to utility, but typically the actual levels of revenue generated are not sufficient to cover even operation costs. 80 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

5HYHQXHV

Table 12.2 Revenues for water and wastewater services in current prices, 1995-98

0'/ PLOOLRQ 0XQLFLSDOLWLHV WRWDO &KLVLQDX %DOWL &DKXO 2UKHL 6RURFD 8QKHQL 9LOODJHV WRWDO 7RWDO Source: Data supplied through consultations with Ministry of Economy and Reforms

Netting and non-cash The figures in the table above represent total revenues (cash and non-cash), but Revenues water utilities, like many enterprises in the official economy, suffer from shortage of cash. A sizeable amount of credits to the customers are actually settled through barter or compensation of credits against debts (“netting”). This represents a serious problem as it poses an immediate strain on the cash flow of the utilities and hampers the ability of water utilities to plan and manage their cash needs - not only for investment purposes, but also for current expenditure.

Taking the case of Cahul Apa-Canal, in 1999, approximately 28% of the revenue was paid in cash and 72% in the form of barter and mutual settlements. This situation is typical throughout Moldova. The fact that the share of non-cash settlements is so high indicates that it is difficult for the Apa-Canal to enforce payment. Some consumers are in a bargaining position where the Apa-Canal must continue supply and must accept to be paid in non-cash forms.

Seen from the point of view of the Apa-Canal there are a number of problems related ton non-cash settlements, including but not limited to:

• The value of veksels received is uncertain; • Mutual settlements are often associated with late payment; • The value of goods received under a barter arrangement is not transparent; • Barter transactions (and to a lesser degree veksels and mutual settlements) have high transaction costs.

We have not been able to make an analysis of the extent and structure of non -cash settlement in Moldova. However, the interested reader is referred to the working 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 81

paper: "Environment related non-monetary transactions in Russia" also published under this project36.

([SHQGLWXUH Details of the operating costs for the water utilities are provided in the table below. The expenditure is that reported by the apa-canals and they include depreciation as required by the accounting standards. This depreciation does not reflect the real need for maintenance, which is estimated in the next chapter.

Table 12.3 Operation and maintenance expenditure 1995-98

0'/ PLOOLRQ 0XQLFLSDOLWLHV WRWDO &KLVLQDX %DOWL &DKXO 2UKHL 6RURFD 8QKHQL 9LOODJHV WRWDO 7RWDO Source: Data supplied through consultations with Ministry of Economy and Reforms

Comparing the expenditure data to the revenue data in Table 12.2 it can be seen that only Apa-Canal Chisinau has revenues in excess of expenditure for operation and maintenance.

The situation in villages is critical. Here O&M expenditure is four times as high as revenues.

7KH ILQDQFLQJ JDS Comparing revenues with operating expenditure provides an estimate of the financing gap. This comparison shows that Chisinau is able to cover its own operating costs. The main reasons given for this situation are the relative prosperity of Chisinau in comparison to the rest of Moldova and the high percentage of household in the customer base (households are considered to be more in paying water tariffs that enterprises and budget organisations). This surplus in revenues is used for the repayment of the debt for the major EBRD investment project that is currently being implemented.

36 COWI: Environment related non-monetary transactions in Russia. Working Paper No. 4, Environmental Expenditure in the NIS component. The paper will be available on the project web-site from June 2000: http:\\www.cowi.ru/almaty 82 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

However, in the case of all other utilities there is a financing gap between revenues and operating expenditure. The size of this gap varies from case to case but the overall situation is illustrated in Source: Table 12.2 and 12.3. Figure 12.1.

The difference between revenues and expenditure is covered through the taking on of debt by the utilities: most commonly debts are to electricity suppliers, suppliers of chemicals, and their own staff (through wage arrears).

Source: Table 12.2 and 12.3. Figure 12.1: Water utilities’ expenditure and revenues (excluding Chisinau) 37

:DWHU WDULIIV

7DULII VHWWLQJ SURFHVV Requests for increase in tariffs are filed by the water utilities on an “as needed” basis. The water utilities provide the latest financial statements, a calculation of future costs, and a proposal for new tariffs. The municipalities are the first official counterparts to whom the tariff levels presented. After the tariffs have been agreed with the municipality the Zhudets approve and publish the revised tariff levels.

In principle the utilities are permitted to set tariffs at a level that will allow full- cost recovery (to cover operating costs, replacement and repair of fixed assets, depreciation, paying back of loans and a fixed percentage of profit). However, in practice this is not possible because of the difficulty of getting political agreement on such high levels of tariffs.

37 It is worthwhile to draw attention to the fact that since the revenues presented in this figure include cash and non-cash revenues the financing (or liquidity) gap will be much larger than indicated in this figure. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 83

According to interview sources, the main concern for the municipalities when ap- proving new tariffs are the affordability issues and their concern for the public’s right to have access to water is higher than the concern to the water utilities full- cost recovery policy.

7DULII OHYHOV Tariffs levels differ very considerably from municipality to municipality as is shown in Table 12.4.

Table 12.4 Combined Water and Wastewater Tariffs in April 2000 (MDL / m3)

0LQLPXP 7DULII 0D[LPXP 7DULII +RXVHKROGV 2WKHU FRQVXPHUV EXGJHW RUJDQL VDWLRQV DQG HQWHUSULVHV Source: Institute Acva Project

The differences between the water utilities mean that in order to have any idea of the structure of tariffs and the development over time, it is necessary to have a look at individual examples. Chisinau is not representative of the whole of Moldova, but it is the most important Apa-Canal in the country and is the source of the most reliable data. For this reason, the ACC makes the most suitable example and the development in tariffs is illustrated in Figure 12.2.

Source: Moldovan trends, July - September 1999 & Institute Acva Project Figure 12.2 Chisinau water and wastewater tariff by consumer group 84 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The main conclusions that can be drawn from the figure are:

• There have been substantial increases in the tariff levels for most categories of user - and in most cases these increases have been above the domestic rate of inflation.

• In 1997 there was a move to charge budget organisations the same tariff as industry. By 1999 almost all Apa-Canals charged the same water & wastewater tariffs for both budget organisations and industries.

• There is still heavy cross subsidisation - with charges for industrial users and public institutions being several times higher than the charge for households. According to interview sources, this type of cross-subsidisation is also typical for other Apa-Canals in Moldova. This said, there are policy considerations to end the cross subsidisation and charge a flat rate to all consumers. Two effects are expected from this: A reduction in billed amounts and an increase in collection rates in particular from industries and budget organisations. However, careful timing of the changes will be necessary to avoid a disruptive fall in paid revenues.

,QWHUQDWLRQDO FRPSDULVRQV The below figures compare the charges of Chisinau with those of selected other European cities - Ankara, Copenhagen, Lisbon, Pecs and Prague. The figure illustrates that the charge level of Chisinau is a little lower than the level of Ankara, and that the levels are substantially higher in both Copenhagen and Lisbon and to some extent also in Pecs. While these differences in charge rates presumably are reflections of differences in service levels, it is nevertheless interesting to compare the charge levels to the GDP levels.

This is done in the last of the below two figures. The figure merely provides a rough indication as it provides comparisons to national GDP/capita figures rather than the to the figures that apply in the cities included. Nevertheless, the figure does indicate that Chisinau levels are quite high compared to the other cities. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 85

Source: OECD, Environmental Data, 1999, EBRD Transition Report 1999 Figure 12.3 Charges for water supply and wastewater treatment in selected cities. 1996

Source: OECD, Environmental Data, 1999, EBRD Transition Report 1999 Figure 12.4 Charges for water supply and wastewater treatment in selected cities. 1996 adjusted for GDP per capita 86 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

+RXVHKROG ELOOV

&DOFXODWLRQ RI ELOOV Where no meters are Bills for most consumers are calculated by multiplying tariff rates by consumption installed norms. Using this formula the range of household water bills in Moldova (for consumers without meters) is given in the table below. To present a picture of the range of tariffs charged in Moldova, this table multiplies the different consumption norms by the maximum charge levels found in the country and also the minimum charge levels (see Table 12.5).

Table 12.5 Estimation of the Range of Household Water Bills38

+RXVHKROG 7\SH 1RUP FRQVXPSWLRQ 0LQ ELOO 0D[ ELOO OLWUHSHUVRQGD\ 0'/0RQWK 0'/0RQWK :LWKRXW EDWKURRPV → → → :LWK EDWKURRPV DQG → → → LQGLYLGXDO ZDWHU KHDWHUV :LWK FHQWUDOLVHG KRW → → → ZDWHU VXSSO\

Source: Institute Acva Project

Using these figures it is possible to see how the tariff levels relate to household income. The table below estimates the percentage of household income that water tariffs currently make up for (i) an urban household39 with average levels of income, and (ii) an urban household whose income is in the lowest 20% of the population. A rule of thumb developed by the World Bank is that if they are to remain affordable, water tariffs should not exceed 4% of average household income, and in the table those cases where this threshold is passed are shaded.

Table 12.6 Estimate of Tariff Affordability (urban users without meters)

5DQJH RI ++ ELOOV 0LQ %LOO DV 2 RI 0D[ %LOO DV 2 RI E\ QRUP ++ ,QFRPH ++ ,QFRPH &RQVXPSWLRQ 0LQ 0D[ $YHUDJH /RZHVW $YHUDJH /RZHVW QRUP OSG 4XLQWLOH 4XLQWLOH 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Source: consultant’s own calculations

38 For the purposes of the model an expert estimate of the average household bill in Moldova of 16 Lei per household per month has been used (1999 prices). 39 Only urban dwellers were studied since they are the only part of the population served by the water utilities and subsequently liable to water tariffs. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 87

The table demonstrates that for utilities charging at the lower end of the scale, bills are generally in the "affordable" range. However, the table also illustrates that using the "traditional" affordability criteria of tariffs not exceeding 4% of average household incomes will imply a much higher share for low-income households. In Moldova, an average household among the 20% poorest section of the population will have to pay up to 10% of their income for water and wastewater services even when the "4% rule of thumb" is adhered to.

For utilities with high charge levels the situation is quite different. Only households which are charged according to a consumption norm of 160 lcd or less fall within the "affordable" range. On the other hand 160 lcd is more than metered households use in most of the world. Thus a move to metered consumption could ameliorate the situation for these households.

Where meters exist Where meters exist, bills are calculated by multiplying the metered consumption by the tariff level. The existing situation where the present norms are far higher that actual levels of usage, means that in those cases where meters are installed, bills are four to five times less than without meters.

In Chisinau, this has proved to be a major incentive for householders to install meters and it is estimated that 40% of all apartments in the capital have individual meters. Outside Chisinau this situation is quite different and a maximum of 5% of households have meters.

Average household bill Based on the collected revenue from households for 1998 and the total number of people connected the water supply, the average payment can be calculated. The revenue from households was about 66 million in 1998. With 1.3 million people connected, the average per capita payment in 1998 was about 4 MDL per month in 1998 prices. Average household income for urban population was 217 MDL and 149 for rural population. Approximately 90% of the 1.3 million people connected to water supply belong to the definition of urban population (towns above 10,000 inhabitants) so the average income for the connected population is around 210. Therefore, on average the water payment amounted to 2% of household income.

&RPSDULVRQV ZLWK RWKHU XWLOLWLHV Water tariffs are low compared with other public services such as heat and elec- tricity40. Payments for heat and electricity take up between 85% and 90% of an average households payments for municipal services. Heating bills are typically ten times higher than water and wastewater services while electricity bills are two to five times higher (depending on whether a water boiler has been installed). The

40 The main reason for this situation is that in Moldova almost all energy is imported. Very large debts exist with the main energy exporters (Russia and Ukraine) and following threats to cut off energy supplies achieving full cost recovery for energy use is seen as a priority and energy tariffs are therefore pegged against a US dollar rate. It should also be noted that heating is only supplied during the winter months and therefore heating bills are only issued during these months. 88 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

level of heating bills far exceeds affordability levels and as a consequence very few households have paid these bills (or have been able to pay them).

&ROOHFWLRQ LVVXHV Households Average collection rates vary between different municipalities in Moldova and in the case of collection from households typically range between 60-75%41. The average household collection rate in 1999 was 64% of the total billed. This represents a considerable decrease over the previous year and can be partly accounted for by late payments for 1999 not yet being made but can also be attributed to the significant tariff increases that occurred in 1999.

As regards enforcement, the water utilities have very little power to implement sanctions in the case of non-payments. They typically supply entire apartment blocks and often, the legal basis is collective contracts. This collective approach makes it very difficult to implement sanctions vis-à-vis the non-payers solely as individual non-payers cannot be disconnected separately. A combination of: (i) changes in the form of legal contract the Apa-Canal has with consumers; and (ii) the political preparedness to cut off entire apartment blocks for non-payment, would be required if this situation were to change.

Budget Organisations Collection problems are most serious in the case of budget organisations (both at central and local level), which owe major debts to the utilities. It is estimated that budget organisations are responsible for up to 70% of the Apa-Canal’s bad debts.

Enterprises Since the late 1997, the utilities have been provided with powers to cut off and prosecute private enterprises. This has led to the recovery of some much-needed revenues. No data is available regarding the average collection rates from enterprises, but the received expert opinion (see footnote 41) is that they are similar to those for households.

&DSLWDO LQYHVWPHQW LQ WKH ZDWHU VHFWRU

5HVSRQVLELOLW\ IRU LQYHVWPHQW ILQDQFLQJ As described above, water utilities are responsible covering operation and maintenance costs, but they are not responsible for meeting investment costs.

Theoretical Respon- The responsibility for financing new investment projects used to fall to the na- sibility tional budget (the Public Investment Programme). However, this responsibility has now been officially transferred to the municipal and regional (Zhudets) level. Ac- cording to interview sources there is no clear definition on how investment responsibilities are to be split between these levels of government - only a somewhat ad hoc arrangement that the projects which have Zhudets importance/significance are financed by Zhudets and the municipalities finance the projects which have mu-

41 Information on collection rates has been obtained through consulting the chief engineer from Acva Project. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 89

nicipal importance. Under such a formula it is estimated that 90% of all projects should be financed from the municipality budgets.

Actual Responsibil- Neither the municipalities (with the exception of the comparatively well off Chisi- ity nau Municipal Government) nor the Zhudets have resources available for these investments. The practice is that municipal governments present their proposals to the Government (Ministry of Environment and Terrestrial Development) where they are evaluated and, if deemed to be priorities, are proposed for funding out of the State Budget.

,QYHVWPHQW WUHQGV The MoETD keeps statistic data on capital investment in water and wastewater utilities and these are presented in the table below:

Table 12.7: Water Sector - Capital Investment, 1993-98, million MDL

:DWHU VXSSO\ VHUYLFHV 6WDWH EXGJHW /RFDO EXGJHWV ([WUD EXGJHWDU\ IXQGV (QWHUSULVHV 7RWDO :DVWHZDWHU VHUYLFHV 6WDWH EXGJHW /RFDO EXGJHWV ([WUD EXGJHWDU\ IXQGV (QWHUSULVHV 7RWDO 7RWDO FDSLWDO LQYHVWPHQW 6WDWH EXGJHW /RFDO EXGJHWV ([WUD EXGJHWDU\ IXQGV (QWHUSULVHV 7RWDO

2 RI WRWDO RQ ZDWHU VXSSO\ 2 2 2 2 2 2 2 RI WRWDO RQ ZDVWHZDWHU 2 2 2 2 2 2 Source: Data supplied by Ministry of Territorial Development, Construction and Public Utili- ties

42 Excluding loan repayments for internationally supported water projects. 90 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The following main trends can be observed:

• the main emphasis has been on water supply investments over wastewater treatment projects;

• from 1996 to 1998 virtually all investments have been either from the State Budget or from enterprises own resources; and

• the importance of investments from enterprises own resources has been increasing (this can largely be attributed to the investments being made by Chisinau Apa-Canal showing up in the national statistics).

,QYHVWPHQWV IURP WKH SXEOLF EXGJHWV The Ministry of Finance has provided a list of 1999 investments made from the public budgets (state and local) in the water and wastewater sectors. From this data the following trends are apparent:

• the vast majority of funds (92%) are allocated to the repayment of international loans which have been taken out for two major projects43.

• the other (non-loan) investments are typically for small amounts (USD 5,000 to 10,000); and

• with these smaller projects, there is a major emphasis on rehabilitation and reconstruction of existing systems. There is little new construction which is symptomatic of a system that is falling into disrepair.

National Investment The Ministry of Environment and Territorial Development has prepared an in- Plan vestment plan for water infrastructure over the period 1995-2005. Most of the projects represent either the rehabilitation of existing infrastructure or the comple- tion of construction projects that had been started and then abandoned (due to a lack of funds). Some of the projects have been fully developed to executable projects, while others are still at the feasibility study level.

5XUDO ZDWHU

([LVWLQJ VLWXDWLRQ There are 1,640 rural water facilities in Moldova. Historically all water and wastewater treatment facilities in rural areas belonged to collective farms which owned the assets and provided all the water and wastewater services. Today almost all collective farms are either badly run down or have been sub-divided in

43 The first project is the rehabilitation of the water services in Chisinau (EBRD supported and with a total value of USD 58 million). The second project concerns the construction of a major aqueduct serving the southern regions of Moldova inhabited by the Turkish minority (Comrat- Ciadir Lunga- Vulcanesti). This is worth US$ 35 million, and is supported by a loan from the Government of Turkey to the Government of Moldova. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 91

smaller units. This makes it very difficult to identify the parties currently have the responsibility for operating (and maintaining) the existing facilities as well as making necessary investments. There are four "typical" responses to this situation:

• In about 5% of cases the collective farms are still able to pay the electricity and raw material bills and keep the facility in relative good conditions. They still provide water services for their customers (for free). The farms pay all costs related to water supply and wastewater collection (if it exists).

• In 1% of cases water and wastewater facilities have been transferred to local municipalities. The municipalities provide the services for the local population and all expenses for running these utilities are covered from the municipal budget.

• In less than 1% of agglomerations the local municipality, having taken over the assets, supplies untreated water but has no wastewater facilities. All expenses are met by user charges. Within these agglomerations it is normal to find a share of the population that has no water connection and consequently does not pay for water at all.

• In the vast majority of rural agglomerations (well over 90%) there is no (longer) a centralised water supply or wastewater collection and treatment.

)XWXUH ,QYHVWPHQW 3ODQV International Support At the request of Moldovan Government (Department for Environmental Protection), the World Bank supported a study looking at ways in which to improve the quality of rural drinking water - the top priority for action identified in the Moldovan NEAP. The report was concluded in July 1997 and following an analysis of the (severe) existing problems the report proposed a solution of piping clean water to household. Even using least cost technologies, the estimated investment costs for this project ranged between USD 100 and USD 150 per capita. O&M costs were not included in this figure.

In rural regions of Moldova the average per capita annual income is 1,800 MDL or approximately USD 170. It is therefore apparent that investments of this magnitude cannot be supported by the local population and are not likely to be implemented without a very considerable grant component.

It is also important to note that O&M charges are not covered by this cost calculation. Even if investment costs are covered entirely by grants, it is quite possible that local inhabitants will not have sufficient resources to meet the running costs of such a comparatively advanced system of water supply.

An alternative lower cost (but less effective) solution identified by the study was to close down existing contaminated wells and to build new wells (estimated cost USD 1.750 per well). The report concluded that a study of the cost-effectiveness of these two proposed solutions be carried out, but to date this has not occurred. 92 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

However, an initial back of the envelope assessment can be made. If one assumes that up to 200 persons can benefit from a well with a handpump, the capital costs would be less than USD 10 per capita. This is highly affordable in comparison to the centralised piped water option. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 93

&RVWLQJ RI WDUJHWV

7DUJHW The target was described in detail in chapter 11. Here it merely serves to repeat that the target is "maintaining the existing service level". Thus, the target aims to avoid further reductions in service levels. For treatment of wastewater in towns less than 50,000 inhabitants, there is a difference between the design standard and the actual performance. Here, target means to maintain the design standards, which will require some renovation. Over the past years, the urban water systems have gradually fallen into a state of disrepair with consequent service reductions. The definition of the target however also implies that the option of increasing the service level is considered beyond the financial and economic capacity of Moldova - at least within the coming 10-20 year - given the present economic situation and the existing development trends.

$VVHVVLQJ WKH WDUJHW The target has been defined as "maintaining the existing service level in the urban water sector", and chapter 11 has provided an in-depth motivation of this target. Nevertheless it should be noted that this target definition disregards the rural water sector. As has been shown, rural water supply suffers in particular from poor water quality. In particular as it often relies on shallow water sources that are polluted with among other things nitrates.

There may thus be potential health benefits to be achieved from fairly low costs in these areas. For very small villages, it may prove possible to for example replace a number of individual shallow wells with one central well extracting water from deep sources.

While this part of the water sector has been excluded from the analyses presented in the rest of this report, it should nevertheless be emphasised that the results from these analyses could benefit from being combined with assessments of the extent to which such low cost options are feasible and desirable.

The analyses presented here also apply a national perspective. Thus, it applies an approach of pooling of expenditure and revenues. However, in Moldova the Chisi- nau Apa-Canal is relatively very big. This combined with the fact that Chisinau diverts in many important respects significantly from the Apa-Canals in other 94 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

towns and villages mean that the results are quite biased. Chisinau actually accounts for two-thirds of all costs and is currently implementing a big project partly funded through an EBRD loan. Chisinau provides a higher service level than the rest of the country, and Chisinau covers a region that is wealthier than other regions. While this need not be a crucial issue as regards the results produced, it nevertheless does imply that this feature should be taken into consideration when assessing "average" results and their implications.

$VVHWV DUH EHLQJ GHSOHWHG The next section costs the "maintain the existing situation" target. This is not a trivial exercise.

Deficits lead to Data from 1998 and earlier indicate that water utilities on average are able to cover their operational costs and a small part of their maintenance costs. Outside Chisi- nau many water utilities are not even able to cover their operational costs.

Debt accumulation Information provided to the team also indicate that the realised financial gap that the utilities have experienced for many years now has been covered mainly by the taking on of debt, and by not actually realising the necessary maintenance costs, although these are indicated in the books as depreciation and categorised (in the books as maintenance costs) as expenditure.

The annual taking on of debt means that a debt stock is accumulating and this is highly unsustainable - assuming that the debt has to be paid at some time.

Asset depletion The "un-realisation" of maintenance expenditure means that every year Assets are being depleted. Thus at the beginning of the following year asset levels fall short of the level that would be required to provide an unchanged same service level.

Savings on operation In addition many water utilities "save" on operations by not purchasing required amounts of chemicals for water treatment.

The following section quantifies the expenditure necessary to maintain the existing service level.

&RVWLQJ RI XUEDQ ZDWHU VXSSO\ The costing approach is based on generic cost functions. These cost functions have been developed to reflect investment and operational costs at a West European level, which is then corrected for local cost levels.

Using generic cost functions allow for cost estimation with limited number of input data and still achieving reasonable precise results as data for all major towns are included.

The detailed description of the cost functions can be found in "Decision Support Tool: Model documentation", COWI 2000. Below the key assumptions for each environmental sectors described. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 95

Water supply includes the costs of resource provision (well fields or intakes), water treatment and distribution.

Table 13.1 Main input to costing of water supply infrastructure

1XPEHU RI $YHUDJH SRSXOD %DVLV \HDU VKDUH :DWHU SURGXF 6KDUH RI WRZQV LQ WKH WLRQ LQ WKH EDVLV RI SRSXODWLRQ WLRQ VXSSO\ IURP FDWHJRU\ \HDU ZLWK FHQWUDO DQG JURXQGZDWHU VWDQGSRVW ZDWHU VXSSO\ QXPEHU QXPEHU 2 RI WRWDO OLWUHFDSLWDGD\ 2 SRSXODWLRQ &KLVLQDX 2 2 %DOWL 2 2 6RURND 2 2 *DKXO 2 2 8QJHQ 2 2 2UJHHY 2 2 *RPUDW 2 2 &KDG\U/XQJD 2 2 (GLQHWV 2 2 *K\QFKHVKW\ 2 2 )DOHVKW\ 2 2 1LVSRUHQ\ 2 2 9XONDQHVKW\ 2 2 *ORG\DQ\ 2 2 %ULFKDQ\ 2 2 2 2 1$ 1$ 2 2 1$ 1$ UXUDO DUHDV 1$ 1$ 7RWDO 2 2

1 Consumption from own wells not included.

Source: Consultants estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development.

The estimation of operational costs implies that for each town or category of town, the total operational costs are estimated based on international prices. This resulting cost level is corrected for local price and cost conditions. The key assumptions underlying this exercise are presented below.

Maintenance costs estimated based on the total value of a new system and the annual depreciation rates. The latter are based on the lifetime of the system. For de- 96 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

tails on how cost functions are established: See "Decision Support Tool: Model Documentation", COWI 2000

The results of this costing exercise are shown in the two tables below.

Table 13.2 Total and average unit costs for water supply

,PSOLFLW DYHUDJH :DWHU SURGXFWLRQ 7RWDO DQQXDO XQLW FRVWV FRVWV 0'/P 0LOO P\HDU 0 0'/ 0DLQWHQDQFH 2SHUDWLRQ 7RWDO Source: Costing model calculation

The total costs estimated is equivalent to 1.96 MDL/m3 with again is equal to approximately 0.18 USD per m3.

As the cost functions are based on international cost figures, which is being down- scaled to reflect the Moldavian price and cost level, the correction factors are important for the final result. Below, the input on cost correction factors is shown.

Table 13.3 Cost correction factors for downscaling of maintenance costs

0DLQWHQDQFH FRVW 6KDUH LQ LQ &RUUHFWLRQ 5HVXOWLQJ 6KDUH LQ ORFDO FRUUHFWLRQ WHUQDWLRQDO IDFWRU FRUUHFWLRQ FRVWV FRVWV (TXLSPHQW 2 2 2 0DWHULDOV 2 2 2 /DERXU 2 2 2 (QJLQHHULQJ HWF 2 2 2 &RQWLQJ 2 2 2 /DQG 2 2 2 7RWDO 2 2 Source: Consultant’s estimate

The key assumption is related to the local price of equipment. Based on the consultant’s experience, the price of equipment is not different from the international level when both price and quality (lifetime) is taken into account. The feasibility 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 97

study made for Chisinau confirms that44. Civil work comprises materials and labour and here a common correction factor has been used45.

Similar cost correction factors have been applied to downscale the operational costs and these factors are shown in the following table.

Table 13.4 Cost correction factors for downscaling of operational costs

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(QHUJ\ 2 0DWHULDOV 2 /DERXU 2 2WKHU 2 7RWDO 2 Source: Consultant’s estimate

For operational costs, the price of energy and energy efficiency are the most important elements. The correction factor for energy is comprised of an energy intensity factor of 2 and a local price of 88% of the international level. The energy intensity factor expresses that the water utilities on average use twice the amount of electricity compared to the assumptions embedded in the generic cost functions. This is an estimate being supported by data from the Chisinau feasibility study. Here, total energy consumption is around 1 kWh/m3, while the assumption in the costs functions are about 0.5 kWh/m3 on average.

&RVWLQJ RI XUEDQ ZDVWHZDWHU Urban wastewater includes both the collection and the treatment of wastewater. The latter does not exist in all cases. The key input data are shown below.

The data shown here refers to the "Target scenario" where wastewater treatment is assumed to be performed according to the design standards of the wastewater plants. In most cases these are designed to perform mechanical-biological treatment. Due to lack of maintenance, plants in smaller towns achieve only a degree of treatment equivalent to a mechanical wastewater treatment plant.

In general wastewater amounts are 60-75% lower than water produced. This is mainly due to large losses in the distribution system. However, differences for individual towns indicate that there are significant uncertainty regarding these input data. Most of the data are estimated rather than measured.

44 Rambøll-Krüger Consult Joint Venture: "Chisinau Water Service Rehabilitation Project", Final Report May 1998, 45 This explains why the correction factor for labour in Table 13.4 is different from the value given in Table 13.3. Local labour costs are estimated at about 4% of international costs. 98 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 13.5 Key input data for costing of wastewater collection and treatment

1XPEHU RI 3RSXODWLRQ &RQQHFWLRQ $PRXQW RI $UHD RI WKH 7\SH RI 6KDUH RI WRZQV UDWH ZDVWHZDWHU VHZHUDJH WUHDWPHQW FROOHFWHG FROOHFWHG QHWZRUN ZDVWHZDWHU SHU SHUVRQ V\VWHP WUHDWHG QR QR 2 OFG KD W\SH 2 &KLVLQDX 0% %DOWL 0% 6RURND 0% *DKXO 0% 8QJHQ 0% 2UJHHY 0% *RPUDW 0% &KDG\U/XQJD 0% (GLQHWV 0% *K\QFKHVKW\ 0% )DOHVKW\ 0% 1LVSRUHQ\ 0% 9XONDQHVKW\ 0% *ORG\DQ\ 0% %ULFKDQ\ 0% 0% 0% 1 Area of sewerage network is estimate of the area with sewerage 2 MB means mechanical biological treatment.

Source: Consultant’s estimates based on data provided by Institute Acva Project and the Ministry of Environment and Territorial Development.

The following tables show the resulting costs similarly to the ones shown for urban water supply. The costs have been estimated using the cost functions giving costs in an international price level. Afterwards they have been corrected for Mol- davian price level similar to those of water supply.

Table 13.6 Cost results for wastewater collection and treatment - total costs in million MDL

&ROOHFWLRQ 7UHDWPHQW 7RWDO 0DLQWHQDQFH 2SHUDWLRQ

7RWDO Source: Costing model calculation 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 99

In addition to the operational and maintenance costs, the renovation need for achieving the MB standards for towns in the categories of 10,000 to 50,000 inhabitants and M in the smallest towns has been estimated at around 200 million MDL.

The implicit unit costs are presented in the table below. The implicit unit costs are calculated as total costs divided by the total amount of wastewater collected and treated, which is around 146 million m3 per year.

Table 13.7 Average unit costs for wastewater collection and treatment, MDL/m3 of wastewater

&ROOHFWLRQ 7UHDWPHQW 7RWDO 0DLQWHQDQFH 2SHUDWLRQ

7RWDO Source: Costing model calculation

&DOLEUDWLRQ RI FRVW IXQFWLRQV The generic cost functions where established using only a limited number of input variables. This implies that all local conditions cannot be fully reflected in the functions. Total costs are derived at the national level, and it can be assumed that a number of such local conditions work in opposite direction. Consequently, the calculated totals may still be close to the "correct" level.

This "correct" level is not known. O&M costs for Apa-canals however provide an estimate of the costs of providing the current service level - as far as operational costs are concerned. It is more questionable whether maintenance costs are also included.

Table 12.3 indicates that in 1998 the total operational cost for the Apa-canals were around 250 million MDL in 1998 prices. Assuming inflation of 39% in 1999, these costs would correspond to a level of around 340 million MDL in 1999 prices.

The estimates of costs based on the model calculations as described above results in operational costs of 270 million MDL, and maintenance costs of 320 million MDL. It means that currently 20% of the sustainable maintenance level (as defined above) is included in the cost reporting.

For Chisinau, date from the 1998 financial account give approximately MDL 125 million as total operational costs excluding depreciation. If this is projected to 1999 by applying the inflation rate of 39%, the results is about MDL 170 million. Data on 1999 used for tariff calculations also indicate MDL 170 million as the total costs for 1999.

The model estimate for operational costs for Chisinau is MDL 186 million. Taking into account that the current operation of the wastewater treatment plant is prob- 100 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

able below the design standards, the model estimate fits reasonable well for Chisi- nau.

To conclude, this comparison does not indicate a need for further calibration of the cost estimates from the cost model.

For the estimate of the maintenance costs no current local data can be used to directly validate the estimate. However, the maintenance cost estimate is based on the investment cost analysis. As described in the ""Decision Support Tool: Model documentation", COWI 2000, the investment cost functions are well documented and supported by experience from feasibility studies etc.

The main uncertainty regarding the maintenance costs originates from the correction of the costs of equipment. As shown in Table 13.3, the share of equipment in total costs is about 80%. This based on the assumption that the local unit price for equipment is the same as the international level. The feasibility study for Chisinau includes the same assumption for example for pumps etc.46 If equipment of the same quality (life-time) can be purchased cheaper, it could reduce the maintenance cost estimate.

46 Rambøll (1999) 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 101

6XSSO\ RI HQYLURQPHQWDO ILQDQFH This part of the report describes the baseline scenario for supply of environmental finance covering the period 2000 to 2020. This is based on a description and projection of the supply of finance for environmental purposes from each of the major sources of environmental finance, viz. the public budget, the environmental funds, international financial institutions and donors, the retained earnings of abaters and in the long run the domestic banking sector.

0DFURHFRQRPLF LQGLFDWRU IRUHFDVW The prospects for the Moldovan economy are not optimistic and a World Bank report states that the country

"... is likely to attain macroeconomic sustainability only over the longer term. In the near term, as a small, open, low income economy, macroeconomic outcomes [will be] determined as much by regional economic conditions as by the reforms. Given the consensus forecast of continued economic slowdown for its neighbours and main trading partners, Moldova is unlikely to achieve positive growth in 1999 even with accelerated reform." 47

As a part of its assistance strategy, the World Bank has made projections of the development of the Moldovan economy under two scenarios:

1. immediate and effective reforms (which would in turn increase the levels of available international assistance) called the immediate reform scenario; and

2. a continuation of the "stop-go" reform process that has characterised the country to date, called the delayed reform scenario.

47 Country Assistance Strategy, April 1999, p5. 102 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 14.1 World Bank Scenarios for Economic Development

,PPHGLDWH 5HIRUP 6FHQDULR *'3 *URZWK 2 2 2 2 2 2 2 2 ,QIODWLRQ SD 2 2 2 2 2 2 2 2 &XUUHQW $FFRXQW*'3 2 2 2 2 2 2 2 2 ([WHUQDO GHEW*'3 2 2 2 2 2 2 2 2 'HEW VHUYLFH7RWDO H[SRUWV 2 2 2 2 2 2 2 2 'HOD\HG 5HIRUP 6FHQDULR *'3 *URZWK 2 2 2 2 2 2 2 2 ,QIODWLRQ SD 2 2 2 2 2 2 2 2 &XUUHQW $FFRXQW*'3 2 2 2 2 2 2 2 2 ([WHUQDO GHEW*'3 2 2 2 2 2 2 2 2 'HEW VHUYLFH7RWDO H[SRUWV 2 2 2 2 2 2 2 2 Source: World Bank, “Country Assistance Strategy”, April 1999, p5 for 1998-2008. Consultants own estimate for 2009- 2020.

The Immediate Reform Scenario’s indicator of GDP growth is used as part of the basis to generate the baseline for supply of finance and for the income and price variable which enter the demand for environmental expenditure projection.

While there appears to be a general recognition that the prospects for the Moldo- van economy are not too optimistic, it has nevertheless been decided to apply the immediate reform scenario as the basis for the calculations in this report. Basi- cally, this assumes that the reform process will be accelerated and enter into a stage of smooth and continued progress rather than the past stop-go approach.

The use of the "rapid reform" forecast thus assumes that the country will enter into a period with progressive and reform-minded governments. While the current situation is characterised by a departure from this, Moldova nevertheless made considerable progress for several years during the 1990s right up to the 1998 economic crisis of Russia. The current pullback from this approach is presumably to a large extent a result of the substantial negative impact on the country’s economy from the collapse of the Russian economy in 1998. In recognition of the fact that the forecast is to be very long-termed it has thus been deemed realistic. At the same time it has been recognised that the room to manoeuvre to achieve the (not very ambitious) targets for urban water is already very limited under the more optimistic macro-economic scenario. Little additional information would be gained by looking at a more pessimistic macro-economic scenario.

A projection of the development of exchange rates is also required. It is assumed that the real value of the Moldovan Lei remains unchanged from year 2000 onwards. In other words the changes in the exchange rate reflect that inflation in Moldova is assumed to be higher than "world" inflation. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 103

2WKHU DVVXPSWLRQV

3RSXODWLRQ Given the relatively stable size of the population in the past years and the projections made in the Moldova 21 report, no substantial population growth in the period 2000-2020 is assumed.

Table 14.2 Population in the Projection Period

7RWDO 3RSXODWLRQ H[FO 7UDQVQLVWUD Source: UNDP, Draft Moldova 21 Report

Unfortunately, the Moldova 21 report does not specify the population projection for urban and rural areas respectively. We assume that the overall figures reflect a situation where the natural increase of population is somewhat higher than 62,000 over 20 years, and there is a migration from rural areas to urban areas and from urban areas to other countries. On this basis, we assume that urban areas also maintain relatively stable populations over the 20 year period.

'HYHORSPHQW RI KRXVHKROG LQFRPHV Taking 1999 as a baseline, household incomes are projected to increase at the same rate national levels of GDP increase.

Table 14.3 Development in Household Incomes 2000 - 2020, constant 1999 prices

5XUDO +RXVHKROGV 8UEDQ +RXVHKROGV 7RWDO $YHUDJH +RXVHKROGV Source: Consultants own calculations and WB estimated of GDP growth 104 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 105

)RUHFDVW RI DYDLODEOH ILQDQFH E\ VRXUFH In the following, each source of finance is described and a forecast for the period 2000-2020 is made. Table 15.1 below summarises the forecasts made.

Table 15.1: Summary of baseline scenario: Supply of finance for "urban water" 2000 - 2020

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7KH 3XEOLF %XGJHW

'HVFULSWLRQ Public budget expenditure includes expenditure from both state and local budgets. Expenditure by budget organisations is classified as public expenditure. The Min- istry of Economy and Reforms collects statistical data made by budget organisations on environmental expenditure.

Priorities for public expenditure are decided by the Government and expressed in the state budget. As part of its reform efforts, the Government has focused mainly on the social sectors, developing macroeconomic sustainability, and private sector development (with a particular focus on agriculture and energy reform). Given the economic crisis that the country is currently undergoing, and particularly the heavy debt burden, the Government faces serious limitations in relation to public expenditure. Consequently, relatively low priority has been accorded to environmental measures. This combined with a recent decrease in the funds allocated for capital 106 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

investment has meant that very few resources have been allocated to environmental investments.

)RUHFDVW Based on the existing expenditure patterns and on the macro-economic baseline presented in the previous chapter, the consultant has developed a public finance baseline including a baseline for the future supply of finance for environmental purposes from the public budget. The assumptions behind the baseline are described below, and the baseline is illustrated in Table 15.2.

Table 15.2 Projection of Public Expenditure in Baseline Scenario 2000 - 2020

&RQVWDQW 3ULFHV 0LOOLRQ 0'/ *'3 3XEOLF UHYHQXH VKDUH RI *'3 2 2 2 2 2 2 2 3XEOLF UHYHQXH 7RWDO H[SHQGLWXUH VKDUH RI *'3 2 2 2 2 2 2 2 7RWDO H[SHQGLWXUH )LVFDO EDODQFH 6KDUH RI *'3 2 2 2 2 2 2 2 )LVFDO EDODQFH &DVK 'HEW VHUYLFH VKDUH RI *'3 2 2 2 2 2 2 2 'HEW VHUYLFH 7RWDO H[SHQGLWXUH QHW RI GHEW VHUYLFH (QYLURQPHQWDO H[SHQGLWXUH RI ZKLFK IRU ZDVWHZDWHU :DWHU 6XSSO\ &DSLWDO ,QYHVWPHQWV $GGLWLRQDO JUDQWV WR &KLVLQDX 7RWDO XUEDQ ZDWHU DQG ZDVWHZDWHU

1) Excluding Enterprises Own Funds 2) Source: Consultant’s own calculations based on TACIS Report 1999: Moldovan Economic Trends, except The forecast of real GDP growth and the debt service that are based on World Bank Report: Country Assistance Strategy, April 1999

The forecast is based on the following assumptions:

GDP The GDP figure is based on the GDP for 1999 adjusted by the growth rates in the baseline macro-economic scenario. It has been assumed that the annual growth rate will reach a level of 5% in year 2005 and that the growth rate will remain at that level for the rest of the period, i.e. until year 2020.

Total Public As argued in Section 7.1, the level of public revenues to GDP is high in Moldova Revenue and Expen- compared to other low-income economies. This high ratio (32%) has been main- diture tained throughout the baseline period. It should be emphasised that maintaining a ratio of public revenues to GDP at 32% in an economy in transition will require 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 107

significant and continuous policy initiatives, as the tax base for traditional taxes is eroded.

Public expenditure still exceeds public revenues although the public budget deficit (cash basis) fell from 9.1% of GDP in 1994 to 3.0% in 1998. It has been assumed that the deficit will be maintained at a level of 3% p.a. throughout the planning period. This is in line with experience from the CEE advanced reformers (and many EU countries) where such a public deficit seems to be sustainable. See Figure 15.1 below for an illustration of general government balances in Moldova, CEE and CIS.

Source: EBRD Transition Report 1999 Figure 15.1 General government balances in % of GDP 1989 - 1999

It has further been assumed that the public deficit is financed by domestic debt under unchanged conditions. The Government of Moldova puts great emphasis on its debt service obligations. It has therefore been assumed (in line with experience in recent fiscal years) that debt service takes precedence over other public expenditure.

With regard to public expenditure for environmental purposes, the baseline assumes that the share of environmental expenditure will remain constant in public expenditure net of debt service. This implies that the share of public expenditure for environmental purposes in total public expenditure (and in GDP) will rise as the share of debt service is reduced over time.

The baseline for public expenditure for environmental purposes illustrates the supply of public budget funds available in a situation with unchanged policies. The scenario analysis will therefore look at alternative expenditure profiles reflecting explicit policy choices. 108 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Environmental Environmental expenditure excluding forestry from the public budget amounted to Expenditure MDL 13 million in 199948. This corresponds to a share of total expenditure net debt service of 0.6%. According to the MoETD, a relative increase in the public funds available to the environmental sector is not to be expected, and the present share of total expenditure is therefore assumed to be constant throughout the projection period.

Expenditure for Expenditure for water supply from the public budget amounted to MDL 6 million Water Supply in 1999 (basically covering a small number of priority rehabilitation projects). As with environmental expenditure, a relative increase in the public funds available for the water sector is not to be expected (source: interviews with MoETD) and it is therefore assumed to be constant throughout the projection period.

The finance plan for the Chisinau water rehabilitation project assumes a state grant of MDL 10 million and a city grant of MDL 3 million. This has been included as part of the next years public contribution.

(QYLURQPHQWDO )XQGV

'HVFULSWLRQ In Moldova there is a two-tier system of environmental funds or "Environmental Funds", operating at the national and local (i.e. the Zhudets) levels.

Source: MoETR, Policy Division Figure 15.2: Environmental Funds: Main sources of income

The National The National Environmental Fund (NEF) operates within the administrative Environmental Fund structure of MoETR and does not have its own legal identity. Revenues for the NEF come from two main sources: • a percentage of customs duty levied on imported fuel (this is by far the most important source of revenue); and

48 This figure excludes expenditure related to forestry 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 109

• 30% of the total revenues collected by Local Environmental Funds are also transferred to the National Fund.

Local Environmental Local environmental funds operate within the Zhudet Environmental Agencies. Funds There is no separate administration for the local funds and they are, in effect, a reserve fund to support the activities of the Environmental Agencies. The Envi- ronment Protection Act defines the following sources of revenues for the funds:

• pollution charges; • fines, and claims for compensation for damages caused by the violation of environmental legislation; • income from the sale of confiscated hunting and fishing equipment and products; and • voluntary donations.

6FHQDULR RI UHYHQXH The consultant has prepared a scenario for the future revenues to the Environ- mental Fund system. The scenario has been developed on the basis of projections of the income to the national and local Environmental Funds in the year 2000 provided by the MoETR during interviews conducted by the consultant.

Table 15.3 Forecast of Revenues for Environmental Funds

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/RFDO (QYLURQPHQWDO )XQGV 2I ZKLFK LV WUDQVIHUUHG WR 1() 1DWLRQDO (QYLURQPHQWDO )XQG 2I ZKLFK IURP ,PSRUWHG IXHO 2I ZKLFK IURP /() 2 7RWDO 5HYHQXH 6KDUH RQ ZDWHU VHFWRU 2 2 2 2 7RWDO H[SHQGLWXUH RQ ZDWHU VHFWRU Source: Consultant’s own calculations based on consultations with the Ministry of Environment

As seen in Table 15.3, the scenario implies that environmental expenditure from the Environmental Fund system will increase from MDL 5.6 millions in 2000 to MDL 14.6 millions in 2020 (in constant prices). No statistics on the distribution of funds between sectors are available. Hence, it has not been possible specify supply of finance to individual sectors based on statistics on the existing situation. 110 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The scenario is based on the following assumptions:

Revenue of local Based on information provided by interview sources in the MoETR, the optimal environmental fund revenue, i.e. assuming that the collection rate is 100%, of the Local Environmental Funds in 2000 is estimated to be MDL 4.9 million. However, historically the collection rates for the Local Environmental Funds have not exceeded 10%. Improv- ing the collection rate has been given high priority in the MoETR and is essential as a means of increasing the revenues of the Environmental Fund system. It is therefore assumed that the collection rate will improve gradually to reach a level of 80in year 2010 and that this level will remain constant thereafter. The estimate of optimal revenue of MDL 4.9 million is assumed to be constant in the projection period.

Revenue of the The future revenue of the national environmental fund depends on two factors: the national environ- development in the revenue of the local funds of which the national fund receives mental fund 30% and the development in price and volume of imported fuel, from which the fund collects a tax.

With regard to the fuel tax, three key assumptions have been made: (i) that the volume of imported fuel will increase in line with GDP growth; (ii) that the price (in MDL) of imported fuel will increase in the period in accordance with the projected changes in the exchange rate; and (iii) that the level of the tax as a percentage of the fuel import will remain constant.

(QWHUSULVHV XWLOLWLHV RZQ IXQGV When looking at the supply of finance from enterprises it is important to note that the scope of this project focuses on environmental (i.e. water and waste) utilities. These utilities depend upon revenue collected from user charges to fund their operations and therefore the projection of the supply of finance from enterprises will assess the levels of revenue that can be anticipated from these user charges.

5HYHQXHV IURP XVHU WDULIIV The baseline projection of revenue is derived from the latest account of revenues, as presented in Table 12.2. As baseline it is assumed that the revenue remains constant. Although some of the tariffs have been increased in real terms, indications points to a declining collection rate in response.

The 1998 figures have been inflated to 1999 price level using the inflation rate for 1999 and the results for the two consumers groups, households and industries and budget organisations are shown below. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 111

Table 15.4 Baseline projection of revenue

0LOOLRQ 0'/ $FWXDO FROOHFWHG 3URMHFWHG 3RSXODWLRQ 2WKHU FRQVXPHUV 7RWDO Source: Consultants own Calculations based on data from 1998 from Statistical Report, Form no.1, Water and Wastewater provided by the Ministry of Economy and Reforms

Although the non-household consumers account for less than 30% of the water demand, the higher tariff implies that they pay around 70% of the total revenue. The fact that on average two-third of the revenue is in non-cash payment have been taken into account and the assumptions behind the calculation of the baseline projection is displayed below.

Table 15.5 Baseline projection of revenue from user charges, 1999 prices

&DOFXODWLRQ RI UHYHQXH $VVXPSWLRQV %DVHOLQH SURMHFWLRQ 3RSXODWLRQ %LOOHG DPRXQW &ROOHFWLRQ UDWH 2 &DVK 2 1RQFDVK SD\PHQW 2 9DOXH RI QRQFDVK SD\PHQW 2 9DOXH RI UHYHQXH 2WKHU FRQVXPHUV &DVK 2 1RQFDVK SD\PHQW 2 9DOXH RI QRQFDVK SD\PHQW 2 9DOXH RI UHYHQXH *UDQG WRWDO Source: Consultants own Calculations based on data from 1998 from Statistical Report, Form no.1, Water and Wastewater provided by the Ministry of Economy and Reforms

In the baseline, the revenue is assumed to be constant over the period. 112 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 15.6 Development in Revenue Generated From User Charges for Water 2000 - 2020.

7\SH RI FRQVXPHU +RXVHKROGV ,QGXVWULHV DQG EXGJHW RUJDQLVDWLRQV 7RWDO 5HYHQXH Source: Consultants own Calculations based on data from 1998 from Statistical Report, Form no.1, Water and Wastewater provided by the Ministry of Economy and Reforms

Tariff revenues are the basic income for the water utilities in Moldova (Apa Ca- nals). In principle, the utilities have permission to set tariffs at a level that will allow full-cost recovery (to cover operating costs, replacement and repair of fixed assets, depreciation, paying back of loans and a fixed percentage of profit). How- ever, in practice this is not possible because of:

• the difficulty of getting political agreement on such high levels of tariffs (under the present set-up there are two levels of local government that have to approve any tariff increases proposed by the Apa Canals); and • the limited financial resources available to customers (see section below).

Tariffs levels can differ considerably from municipality to municipality. In addition the charges levied on different types of consumers can also vary widely (typically enterprises and budget institutions pay many times more than household per unit of water supplied - although a proposal has been mooted to introduce a flat rate charge for all consumers).

$IIRUGDELOLW\ LVVXHV Monthly income data for the average household, which is connected to water supply systems, are given in the below table.

Table 15.7: Monthly Household Income for population connected to water supply, 1999, MDL

$YHUDJH /RZHVW 4XLQWLOH ++ 6L]H SHUV ,QFRPHFDSLWD ++ ,QFRPH ,QFRPHFDSLWD ++ LQFRPH Source: Department of Statistic and Social Analysis, Household Expenditure Survey 3rd Quarter 1999.

1 The income data are from the Household Expenditure Survey, see also Table 6.1. The data have been weigthed to take into account that according to the HES rural constitutes population in towns of less than 10,000 population, while in terms of "urban water" we have defined rural to be towns less than 1,500 population. 10% of the population in towns above 1,500 inhabitants live in towns between 1,500 and 10,000, while 90% live in towns with more than 10,000 inhabitants. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 113

Using the projected revenue from households of about MDL 93 million gives a monthly per capita payment of 6 MDL. This is equivalent to about 2.3% of average household income. For the poorest 20% of the households it would amount to more than 5%.

The World Bank operates with a rule of thumb that sets 4% of average household income as the maximum affordable level for expenditure on water services49.

Taking the above analysis into consideration it can be concluded that the issue of affordability means that there is some scope for a substantial increase in existing tariff levels. However, the above data refers to the actual collected amount. No conclusive information on collection rates is available, but based on expert judge- ments50 currently 60-70% of billed amount is collected.

Assuming a collection rate of 65%, the billed amount is about 9 MDL per person/month and that is 3.5% of average household income.

'HEW ILQDQFLQJ

'HVFULSWLRQ The government of Moldova has relied on government borrowing and payment arrears in response to the consistently large public deficit. However, in the absence of economic growth, Moldova’s debt stock is now a substantial burden on the economy and has considerably reduced its creditworthiness.

So far, two financing institutions have provided debt finance in the environmental/water supply sector to Moldova, the European Bank for Reconstruction and Development (EBRD), and the Turkish Government.

It should be noted that the deteriorating debt situation of the country convinced the government to stop issuing sovereign guarantees (except in exceptional circumstances). Such a situation means that, at present the possibilities for World Bank support of large investment projects is limited. However, the World Bank should also be considered as a potential source of such financing over the medium term.

The EBRD The EBRD has been active in Moldova since 1994. By the end of June 1999, the Bank had invested EUR 153 million in Moldova in support of projects with a total cost of EUR 370 million.

49 Given that Moldova is a low-income country and that water can be considered a basic human need, it is probable that the World Bank thumb rule of a 4% affordability level of disposable income used for water and wastewater may be exceeded - but this will, of course, depend on the political will to increase tariffs. 50 Mr V. Bordeniuc from Acva Project 114 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Priorities The EBRD’s strategy for Moldova focuses on the objectives of: • promoting private sector development – with a particular emphasis on the agro-processing sector, • supporting the strengthening of the financial sector, and • financing critical infrastructure investments.

The environmental sector is therefore not a priority area for the EBRD. However, the Bank has provided finance for the Chisinau Water Services Rehabilitation Project with a total commitment of Bank funds of USD 22.75 million. The project aims at upgrading the water and wastewater services in the capital of Chisinau and is supported by a USD 2.5 million grant from the Danish Co-operation for Envi- ronment in Eastern Europe (DANCEE) to cover technical assistance and project supervision.

According to interview sources51, the EBRD is potentially interested in contribut- ing to investment projects in the water and waste sectors. However, there are no concrete projects in the pipeline and the current investment climate is not considered favourable. So far, the EBRD has required sovereign guarantees on their loans (except credit lines to local banks). However, given the present situation, the Bank is now looking to direct co-financing from government institutions or private guarantees/partnerships as a means of securing the loans.

Turkish Government Loan There is a sizeable ethnic Turkish minority in the south of Moldova, which is also the region where water supply problems are the greatest. Recognising this situation, the Turkish government has provided a USD 35 million loan to a rural water supply project that will enable the construction and reconstruction of the water- supply system in three towns (Gagauzia-Komrat, Chadyr-Lunga, Vulkaneshty) and a number of villages.

The World Bank Moldova joined the World Bank in 1992 and the International Development Asso- ciation in 1994. Since then, bank lending has provided support for Moldova’s economic reform programme. By August 1999, Bank commitments totalled approximately USD 384 million for 13 projects.

Moldova is now classified the World Bank as a low income country. Whereas the World Bank classified Moldova as eligible for IBRD loans before 1997, it is now only eligible for IDA credits.

Priorities The primary focus areas of World Bank activities in Moldova, as identified in its current Country Assistance Strategy (CAS) for the period 2000-2001, are: • promoting macroeconomic sustainability, • poverty reduction, • private sector development, • agriculture and energy reforms, and • public sector reform.

51 EBRD Resident Office in Chisinau 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 115

The environmental sector is hence not a priority area for the World Bank - at present. and the Bank does not intend to play a role in infrastructure investment in the short-term (preferring to leave such projects to the EBRD). However, the current CAS does indicate that investments related to water supply, sewage, and energy consumption could be an important area for support in medium term52.

)RUHFDVW The debt situation Moldova faces a serious debt situation and the capacity to take on new loans is severely limited. However, According to World Bank’s Immediate Reform Sce- nario, prudent fiscal management means that further increases in the debt/GDP ratio can be avoided after 2008. The cumulated level can be maintained at 64% of GDP and debt service of 14% of total exports).

The Consultant has assumed that the situation in 2008 with an accumulated debt / annual GDP ratio at 64% will continue until 2020. Moreover, the GDP is assumed to increase by 5% each year and it is this growth that generates the capacity for new debt financing in the medium to long term. If these figures are accepted the implication is that additional loan financing will be possible over the medium to long-term.

Table 15.8 Estimate of Capacity of New Debt from 2008 to 2020

&RQVWDQW 3ULFHV 1HZ 7RWDO 'HEW SHU \HDU 0LOOLRQ 0'/ 1HZ 7RWDO 'HEW SHU \HDU 0LOOLRQ 86'

Source: Consultants own calculations

The question of how much of this additional debt financing could be allocated to environmental or water supply expenditure is ultimately a political one - it will depend on the policy priorities of the government that takes on the debt, and currently while improving water supply is considered as a priority, other environmental projects are not. This said, it is encouraging that the World Bank recognises the severity of the problems in water supply and sewerage sector and is prepared to consider this area as a component in the next CAS (covering the period after 2002).

7KH GRPHVWLF ILQDQFLDO VHFWRU Domestic banks are only prepared to offer short-term loans (the usual maximum is one year) with high interest rates (the spread between deposit and lending rates is large). At the same time, while a stock exchange has been established as early as June 1995, the domestic securities market still remains underdeveloped. As illustrated in the figure below, interest rate spreads in Moldova were (until 1998) lower than the average for CIS. However, the Russian crisis in 1998 demonstrated the vulnerability of the financial markets in Moldova and interest rate spreads increased significantly.

52 World Bank, Country Assistance Strategy, 1999, p. 12 116 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: EBRD Transition Report 1999 Figure 15.3 Interest rate spread (1 year) 1991-98, Moldova, CEE and CIS

The EBRD and the World Bank have offered limited credit lines to several of the more stable local banks. In case of the EBRD the target of the loan was the Banking Sector as such. In case of the WB the target was the medium and small enterprises (through of cause the local banks). In both cases anyway the utilisation matches the planned schedule of disbursements according to interview sources. These enable the banks to lend for longer term investments. The conditions associated with the credit lines are varying. In general, there is a 3-7 years repayment period and 12-18% interest depending of the client and the project53. Exchange rate risk is borne by the final borrower. This implies that the loans at present are only attractive for exporters which can hedge the exchange rate risk with foreign denominated revenues

Development of a domestic credit market for medium term credit will require sustained consolidation of the banking sector, effective and prudent banking supervision, and last, but not least, achievement of macro-economic stability over a longer period. In other words, financing of environmental investments using commer- cially raised, domestic credit remains a long term outlook.

Thus in the baseline, we have assumed that there will be no financing from domestic commercial credit. Although the above-mentioned on-lending of IFI credit lines could offer possibilities for financing "win-win" environmental projects re- quiring medium-term investment (e.g. energy saving investments such as the re-

53 Information obtained January 2000 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 117

placement of outdated and inefficient pumping technologies) it has been assumed that water utilities and municipalities will find it difficult (or too costly) to enter into such arrangements in the baseline scenario. 118 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 119

)LQDQFLQJ JDS V LQ WKH EDVHOLQH DQG WDUJHW VFHQDULRV

%DVHOLQH VFHQDULR The baseline scenario is defined as continuation of actual existing situation. Thus, the baseline scenario implies that the infrastructure currently operating continues to operate and it is maintained to do so.

Table 16.1 Moldova baseline financing gap 2000 - 2020

0'/ PLOOLRQ IL[HG SULFHV 7RWDO H[SHQGLWXUH UHTXLUHPHQW 7RWDO VXSSO\ RI ILQDQFH %DVHOLQH ILQDQFLQJ JDS Source: Consultant’s estimate.

The decrease in expenditure need is caused by the implementation of the ongoing Chisinau water rehabilitation project. This project is financed through international loans and a temporary increase in the state and municipal grants to the project. Thus, the supply of finance drops from 2002 to 2003 when the Chisinau project is finished. After that, supply of finance increases gradually caused by the public budget contribution following the projected GDP development path.

7DUJHW VFHQDULR The targets the maintaining of the existing situation with regard to service levels and supply of finance. The only difference to the baseline regards the wastewater treatment. Here, target is the existing designed treatment level, which currently is not fully achieved. Otherwise, the target scenario is similar to the baseline scenario. That implies, among other things, that the share of the population that it serviced by central water systems is assumed to remain unchanged at a level of around 40%, and that the quality of the water and the regularity of supplies are maintained at the current levels.

Below we summarise the financing gap that is documented in this chapter. 120 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 16.2 Moldova target financing gap 2000 - 2020

0'/ PLOOLRQ IL[HG SULFHV 7RWDO H[SHQGLWXUH UHTXLUHPHQW 7RWDO VXSSO\ RI ILQDQFH 7DUJHW ILQDQFLQJ JDS

The initial gap of MDL 340 million per year is reduced over time primarily as a result of the reduced operational costs, which follow in particular from the Chisi- nau Water Project. After the year 2005 expenditure is further reduced as the EBRD and Turkish loans become repaid and loan service approaches 0.

(QYLURQPHQWDO H[SHQGLWXUH QHHGV Chapter 13 provided a detailed description of the costing of the existing service levels. The below table summarises the resulting total expenditure needs based on the assumptions described and explained in chapter 13. The expenditure data have been derived based on cost model.

Table 16.3 Expenditure 2000 - 2020 (million MDL) in target scenario

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Source: Consultants own estimates, see Chapter 13.

Water supply accounts for about 2/3 of the total expenditure and wastewater for the remaining 1/3. Operational costs are seen to contribute for almost half of the total estimated recurrent expenditure need, i.e. excluding renovations and loan service expenditure. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 121

The loan service payments included in the table are those that relate to the Turkish and the EBRD loans. The EBRD loan is used for renovation of the facilities of the Apa-Canal Chisinau, and this expenditure is included in the first three years of the table (2000-2002) assuming an equal distribution over the three years of 80 million MDL annually. This renovation will however result in reduced maintenance and operational costs as can also be seen from the table where these costs decline from a level of 320 and 270 MDL respectively and down to a level of 307 and 216 respectively from year 2003 and onwards.

Apart from the Chisinau project and the repayment of the Turkish loan, the demand for finance can be seen to be relatively stable over the short and medium term. The main reasons for the resulting stability are the following assumptions:

• The nature of the target itself. The target simply aims to maintain the existing environmental situation. Therefore no new environmental investments are necessary to accomplish the target;

• The assumed constant population size implies that the demand for environmental services will also remain constant; and

• The assumed unchanged water demand, including leakage. The above assumes that water demand will not change over the observed period, except for the effect of the renovations undertaken in the context of the Chisinau project (as explained above).

No Investment Consequently, the projections do not assume any new investment or major reno- Expenditure vation works.

Chisinau accounts for a significant share of the total expenditure need. Table 16.4 shows the operational and maintenance costs for Apa-Canal Chisinau (ACC). Again, it should be emphasised that the data shown in the table are derived from the cost model. Inevitably, they are therefore subject to some uncertainty, although their validity has been thoroughly assessed, and, as discussed in Chapter 13, the results do correspond to actual data in the case of operational costs - a case where actual data could be obtained.

Table 16.4 Operational and maintenance costs for Apa-Canal Chisinau (ACC)

([SHQGLWXUH :DWHU VXSSO\ 5HQRYDWLRQV 0DLQWHQDQFH 2SHUDWLRQDO :DVWHZDWHU 5HQRYDWLRQV 0DLQWHQDQFH 2SHUDWLRQDO 122 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

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ACC accounts for 50% to 60% of the total expenditure need. As an implication of the renovation projects (and the resulting assumed costs savings) ACC will contribute a slightly decreasing share of the total expenditure need over the first three years of the observed period.

6XSSO\ RI HQYLURQPHQWDO ILQDQFH The future supply of environmental finance from different sources was analysed and estimated in chapter 14. The results are summarised below.

Table 16.5 Summary of supply of finance - Moldova

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The public budget contributes a relatively high share during the first three years of the period. This high contribution is explained by the agreement underlying the Chisinau project, where the domestic financing share of the projects is around 50%. This corresponds to a significant increase in the public commitments. In the table, the international loans include only the EBRD loan for the Chisinau project. The Turkish loan has been disbursed already and the loan service is included in the expenditure need, see Table 16.3.

User charges are the main contributor of finance. Domestic consumers thus contribute about one-third of the total revenue. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 123

ACC also plays a dominant role in the overall picture of finance for the water sector, as it did in the case of expenditure. Therefore, a separate presentation of the supply of finance to ACC is shown below. This separation also allows for an assessment of financing gaps both at the national level and for Apa-Canal Chisinau separately.

Tariff increases is a component of the agreement underlying the renovation project at ACC. As explained and discussed in chapter 12, the tariffs for year 2000 are significantly increased compared to the 1999 level. This increase has not been included in the baseline supply of finance. The motivation for this exclusion is that it is not yet known to what extent this increase actually results in a proportional increase in revenue. The response from consumers may also be reduced payments of bills (i.e. lower collection rates) and/or an increase in the fraction of bills that is settled by non-cash payments, which have a lower monetary value.

Table 16.6 Baseline supply of finance at Apa-Canal Chisinau (ACC)

8VHU FKDUJHV +RXVHKROG 2WKHU FRQVXPHUV 7RWDO XVHU FKDUJHV 3XEOLF EXGJHW )RUHLJQ ORDQV DQG JUDQWV 7RWDO VXSSO\ RI ILQDQFH 1 Public budget includes the Environmental Fund. Year 2000 to 2002 includes all of the of both public budget and international assistance and loans as it is related to the Chisinau project, while in the rest of the period, half of the public and international contributions are assigned to Chisinau.

,QLWLDO ILQDQFLQJ JDS

7DUJHW 6FHQDULR LQLWLDO JDS Figure 16.1 illustrates the initial financing gap in target scenario. It provides an estimate for each of the years considered of the gap between the expenditure need and the supply of finance. It is thus a cash-flow gap.

A comparison of the demand and the supply of finance for the water sector shows that the in the target scenario supply of finance is estimated to cover only between 50% and 66% of the total annual sustainable O&M costs. The initial supply of finance can cover the operational costs and a small fraction of the maintenance costs. 124 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: Consultant’s own calculations Figure 16.1 Initial financing gap 2000 - 2020, MDL million

The user charges, which are the main contributor to the supply of finance, are assumed to remain constant over the period. This allows us to see more clearly the consequences of alternative assumptions about growth in household incomes and maintaining user charges as a fixed share of household incomes.

The public budget component is the only one whose contribution increases over the period. However, the combined result of these increases and the cost savings that result from the Chisinau project, is that the financing gap decreasing slightly over the period.

O&M Costs In the process of analysing the financing gap and in particular its effects, the definition of maintenance costs should be borne in mind. The model’s definition of operational costs represent the recurrent costs involved in running the existing infrastructure. This could be the cost related to for example wages, electricity and chemicals. Maintenance costs are defined by the cost functions of the model to include the capital repairs that are necessary to maintain the system’s technical ability to perform at the same level over time. This would for example include the cost of pump replacements once the existing pumps have reached the end of their effective lifetime.

The implication of the above is that, if only operational costs are provided for, the value of the system will consequently decrease. This will in turn lead to a reduced service level - with some time lag. The sustainable maintenance cost is thus de- 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 125

fined as the expenditure that is needed to keep the system at a constant level over time - where constancy applies the system’s value and its operational effectiveness.

If the system is not properly maintained, its value will decrease. Consequently, investments will be necessary to bring the level back to the starting point. Such investment expenditure is labelled renovation expenditure or rehabilitation expenditure.

The diagram below provides a graphic illustration of these important distinctions and definitions.

Source: Consultant’s own calculations Figure 16.2 Principles of rehabilitation, maintenance and operating expenditure

The estimation of O&M costs rests on two important assumptions. Firstly, it is assumed that maintenance costs are constant, i.e. equivalent to a linear depreciation of the infrastructure. Secondly, it is assumed that the operational costs remain constant, also in cases where the system is not maintained.

As explained above, service is likely to be reduced - but with a certain time lag - as a result of lack of maintenance. Prior to the service reduction however, the lack of maintenance is likely to result in increased operational costs. This can be due to for example increased leakage and lower pumping efficiency. However, the rela- tionship between the lack of maintenance and the effect on operational costs is very specific. Exact knowledge on the relation would require that one know ex- actly which type of equipment and machinery that would not maintained. The lack of such specific knowledge is the prime motivation for not setting up a general cost function.

The initial financing gap based on the targets and current level of finance is significant. Consequently, the realised maintenance level can be assumed to be significantly lower than what would be required to maintain the existing service level. The accumulated lack of maintenance, year by year, is one way of measuring the continued deterioration of the water infrastructure. 126 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The backlog of maintenance indicates the potential magnitude of service reductions although it should be noted that there is no simple relation between the lack of maintenance and the resulting service level - as explained above. A calculation of the backlog of maintenance can be used to assess and compare the effects of alternative options for reducing or closing the financing gap.

Source: Consultant’s own calculations Figure 16.3 Backlog of maintenance with target expenditure and baseline supply of finance 2000 - 2020

The financing gap would result in a backlog of about 5.6 billion MDL over a 20- year period. By comparison, a rough estimate of the value of a new water sector infrastructure that would correspond to the existing one, lies in the order of approximately 15 billion MDL. The potential decline of the value of the system can therefore be estimated to about one-third over the twenty-year period.

The national affordability gap is another indicator of a possible financial shortage. The national affordability gap calculates the GDP contribution that would be necessary to maintain the existing infrastructure.

1DWLRQDO DIIRUGDELOLW\ JDS In general terms, the national affordability gap is defined as the difference between annual O&M costs for the environmental infrastructure in question and the national income available for the that infrastructure.

The annual operational and maintenance costs that are relevant to assess the national affordability gap are similar to those that were included in the assessment of 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 127

the financing gap. This is because this study does not have a target scenario that includes new investments.

The figure below shows that share of GDP that would be necessary to sustain the current level of water sector infrastructure. The baseline projection of positive GDP growth (see chapter 14) over the period causes the share to gradually decrease.

Source: Consultant’s own calculations Figure 16.4 Share of GDP necessary for closing the national affordability gap

This figure illustrates the share of national income which would have to be set aside for urban water expenditure in order to achieve the target of sustaining the current situation.

The current total domestic expenditure for the urban water sector amounts to about 2.7% of GDP. The figure shows that in year 2000 almost a doubling of this share would be necessary to stop further deterioration. Although the share gradually decreases due to GDP growth, it would only be down to 2.7% of GDP around 2013. The underlying GDP projection assumes annual growth rates of 5% per year from year 2005 onwards. This is, as mentioned also in chapter 14, a relatively optimistic scenario. 128 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: Consultant’s own calculations Figure 16.5 Backlog of maintenance with 2.7% of GDP spent on urban water and with target expenditure

If one assumes that a GDP share of 2.7% is used for the urban water sector, the backlog of maintenance can be estimated. Although the gap can be closed, the backlog will remain significant over the whole period points to the need for attracting a larger share of the national income or reduce the expenditure need in order to achieve the target of maintaining the current level of service.

)LQDQFLQJ JDS IRU &KLVLQDX 50% of that part of the population, which is connected to central water supply is serviced by the Apa-Canal Chisinau. ACC further supplies around 80% of the total amount of water supplied through central systems.

The baseline financing gap for Chisinau is shown below. Chisinau accounts for about 58% of the expenditure and for around 75% of the supply of finance. Ac- cordingly the relative finance gap for Chisinau is smaller than the national gap. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 129

Table 16.7 Financing gap for Chisinau

Σ Σ WR WR 7RWDO H[SHQGLWXUH 431 310 310 285 285 3,733 6,683 %DVHOLQH VXSSO\ 308 185 190 194 199 2,398 4,342 %DVHOLQH ILQDQFLQJ JDS 123 125 120 91 86 1,335 2,341 %DFNORJ RI PDLQWHQDQFH 123 725 1,335 1,900 2,341

The backlog of maintenance amounts to MDL 2 billion, which is around 40% of the national backlog.

This assessment serves to illustrate that the situation is better in Chisinau than in other Apa-Canals of Moldova. This was also explained in chapter 12, and it also applies to the case of financing the current service level. In other parts of Moldova it is not only is the level of service that it much lower than in Chisinau, but also the current financing gap that is larger.

&ORVLQJ WKH JDS By their mere size, the financing and national affordability gaps strongly emphasise the need to identify and analyse possible options to close the gaps. There are two categories of options to be considered. One category would consist of options to increase the supply of finance, and another category would include options to reduce the demand for finance. Chapters 17 and 18 analyse options within these two categories. Subsequently, chapter 19 estimates their potential effects on the financing gap.

The backlog of maintenance is an indication of the further supply of finance that would be necessary to sustain the current level of service. This chapter has shown that 3 billion MDL would be necessary to remove the financing gap and restore the system at the current level before year 2010.

The table below provides a rough estimate of the contribution increase that would be necessary from various sources in order to close the gap and eliminate any backlog before 2010. The table has been elaborated under the hypothetical assumption that each contributor would have to solely finance the gap. 130 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 16.8 Hypothetical additional finance to close the gap and remove the backlog before 2010

7\SH RI ILQDQFLQJ VRXUFH $FFXPXODWHG FRQWULEXWLRQ $GGLWLRQDO ILQDQFH UHTXLUHG IRU WR DFKLHYLQJ QR EDFNORJ LQ 0LOOLRQ 0'/ 0LOOLRQ 0'/ )DFWRU RI LQFUHDVH 3XEOLF %XGJHWV (QYLURQPHQWDO )XQGV 8VHU FKDUJHV +RXVHKROGV 2WKHU FRQVXPHUV 7RWDO GRPHVWLF VRXUFHV ,QWHUQDWLRQDO ORDQV 7RWDO )LQDQFH 1 Numbers have been accumulated in this figure in fixed prices, but with no discounting of future values. In reality the feasibility and "burden" of a particular path to remove the backlog also depends on the distribution of the additional finance required over time. This is illustrated in the figures in Chapter 19.

If public budgets where to close the gap, the contribution from public budgets would need to be increased more 10 times. The main source of finance, user charges, would only need to provide the double of the baseline supply to cover the financing gap over the 10 years period.

Therefore, it is clear from the table above that it is not feasible to close the financing gap using one instrument only. The following chapters look at the main available instruments in turn. Chapter 19 combines some of the instruments analysed into scenarios. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 133

• Extending the coverage of water meters. The experience of Chisinau has demonstrated that the demand for water has dropped considerably once members of the general population have started installing meters (a drop in demand for water of more than 30% since 1991, even though only 42% of households have meters).

The less the demand for water, the less the Apa-Canal has to pump and to treat. In Chisinau this has been transformed into operational savings. Per capita water production in Chisinau is still high and there is scope for further operational savings. As mentioned this has been included in the baseline and target expenditure as part of the Chisinau Water Improvement Project.

In many of the smaller towns water production are in the 200 lcd range and the scope for reduction of water production is less. However, if and when the possibility for 24 hours supply is restored in these towns, water savings pro- moted through campaigns, enforcement of payment of water bills, possibly water meter programmes, will be an important contributor to bring water demand in line with production capacity.

Technically, we have assumed that these activities are funded out of regular O&M expenditure and that the benefit achieved is that no capacity extension will be necessary in the smaller towns.

• Reducing the level of leakage from the system would also reduce the amount of water that the Apa-Canals must pump and treat. The option of reducing leakage by large scale pipe replacement programmes is generally not cost effective. As part of the Chisinau Water Improvement programme a replacement of 8% of the pipes is foreseen.

We have included pipe replacement corresponding to average lifetime, but no large scale pipe replacement in the other cities. Leakage may in many cases also be reduced by combining additional pressure zones (which may require limited investments in pressure reduction valves etc.) with a change in the mode of operations. The possibilities hereof will have to be investigated on a case by case basis by the Apa-Canals.

• Where practicable, replacing existing wastewater treatment facilities with constructed wetlands and lagoon treatment (techniques have low operating costs compared to other methods of treatment). However, feasibility studies are necessary before this option can be developed.

5HGXFLQJ WKH OHYHO RI VHUYLFH Given the considerable size of the financing gap, there is a risk that an effort to seek to maintain the entire infrastructure proves to be infeasible, and consequently to result in an overall lower service level than the one that would result from a focusing on priority parts of the infrastructure. The realistic risk that today's insufficient level of maintenance will continue puts an emphasis on the need to consider 134 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

means of prioritising the infrastructure. Inherent in such an exercise would be the need to reconsider current service level standards.

MoETD proposals The Moldavian authorities accept that in certain circumstances even the existing situation may not be affordable and reduction in standards and/or services will prove necessary. Against this context the MoETD made the following proposals:

• Increase the current (very strict) emission limits to levels that are realistic in terms of the polluters ability to treat emissions (one suggestion mooted was to increase BOD limits from 3.5 mg/l to 15 mg/l). Such a measure would allow the Apa Canals to plan treatment facilities that aim to provide realistic levels of treatment.

The current standards for wastewater treatment imply that concentrations of pollutants after treatment are very low. The standards are generally not complied with at the existing facilities. The requirements are actually more demanding than the EU standards.

There will be no immediate (national) cost savings as a result of this, since such a modification of emission requirements would reflect what is currently possible with the technology of treatment plants installed. There may be a reduction in transfer payments from the Apa-canals to the State budget / Envi- ronmental Funds as fees and fines for emissions are reduced. These fees and fines are quite small today and we have not included this in our calculations.

Given these characteristics of the current situation, it seems reasonable to assume that the criteria cannot be met in the foreseeable future either. Conse- quently, one of the first priorities would be to adjust the standards for wastewater treatment down to a level similar to the EU. Furthermore, it could be, and has been, discussed whether these lower standards can even be complied with in all towns. Depending on health and environmental impacts and conditions, the requirement for wastewater treatment in the major towns and settlements might be adjusted further downwards.

• In smaller towns (less than 10,000) stop carrying out biological wastewater treatment – i.e. rely on mechanical treatment only. This reflects the existing situation (where the biological treatment facilities are in place but not working). However, the cost reductions from such a measure are very limited approximately 5 million MDL per year. This reflects that only very few of the small towns have WWTP facilities at the present time.

It is the assessment of the consultant that the service reduction ideas presented by the Ministry are not very ambitious. This is also reflected in the cost savings, which totals approximately 5 million MDL per year or 1½% of the initial financial gap. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 135

Table 17.2 Cost savings potential from mechanical treatment in towns less than 10,000

0'/ PLOOLRQ SULFHV Σ Σ WR WR ,QLWLDO ILQDQFLQJ JDS 2SHUDWH PHFKDQLFDO WUHDWPHQW LQ VPDOO WRZQV 5HVXOWLQJ ILQDQFLQJ JDS

Source: Costing model calculations. Note: The cost of capital repairs has for illustrative purposes been included in year 2000. In the calculations and elsewhere these capital repairs are assumed to take place in 2001-03.

Further options A further option that could be considered (although is was not proposed by the MoETD) is closing down wastewater treatment facilities in areas where (i) the state of disrepair is such that they are not providing effective treatment, and/or (ii) the environmental consequences of closing them down is not excessively damaging.

Only mechanical There are only few small settlements, i.e. with population between 1500 and treatment in 10000 inhabitants that have some form of treatment of the wastewater. The condi- most towns tion of these facilities is reported to be low.

It can be calculated that:

• if there were no wastewater treatment facilities for towns below 10,000 inhabitants in operation; • if all towns except Chisinau and Balti had mechanical treatment only;

this could give to a total reduction of operation and maintenance costs by about 20 million MDL. This is equivalent to 9% of the operations and maintenance costs for wastewater.

It is initially surprising that the expenditure savings are not large from such a seemingly drastic measure. However, it should be noted that: approximately 70% of the current wastewater treatment expenditure is incurred in Chisinau and Balti; the cost differential between maintaining a mechanical versus a mechanical - biological plant is not very big; and that the operational savings in moving from MB to M treatment only is less than 50%.

The effect on the backlog of maintenance of reducing the service level for wastewater is shown below. The calculations include both the option of reducing treatment down to only mechanical in all towns except Chisinau and Balti and the option of omitting all treatment in towns below 10,000 inhabitants. 136 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: Consultant’s own calculations Figure 17.2 Backlog without and with reduced WWTP service

Table 17.3 Cost savings potential from mechanical treatment all towns except Balti and Chisinau, no treatment in the smallest towns

7\SH RI RSWLRQ 0LOOLRQ 0'/ Σ Σ IL[HG SULFHV WR WR ,QLWLDO ILQDQFLQJ JDS 0HFKDQLFDO WUHDWPHQW LQ DOO WRZQV H[FHSW %DOWL DQG &KLVLQDX DQG QR WUHDWPHQW LQ WRZQV OHVV WKDQ SRSXODWLRQ 5HVXOWLQJ ILQDQFLQJ JDS

Source: Costing model calculations Note: The cost of capital repairs has for illustrative purposes been included in year 2000. In the calculations and elsewhere these capital repairs are assumed to take place in 2001-03

Reduced water Water supply contributes the largest share of the estimated expenditure need. supply service However, urban water supply still includes infrastructure only for less than half of the population. It could therefore be an option to reconsider the service options for water supply.

A service level with piped water from central systems with high regularity as the means of ensuring the supply of good quality water does not seem appear to be affordable at all locations. Thus, alternatives should be identified and evaluated. In 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 137

particular the option to establish a large number of deep boreholes with handpumps and quality water could and should be investigated also for cities up to 25,000 inhabitants.

This has however not been feasible with the present study. The scarcity of good quality ground water resources makes it difficult to make a general assessment, as it would require an explicit inclusion of all the specific local conditions. This option has not been considered but it is part of study recommendations to initiate such assessments. As mentioned earlier, a previous World Bank study came to the same conclusion in 1997. 138 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 139

3ROLF\ RSWLRQV WR LQFUHDVH VXSSO\ RI ILQDQFH The decision to increase the allocation of public funds for environmental expenditure is ultimately a political one. Therefore, it is essential to convince decision- makers that are responsible for public finances (at national and local government levels) that certain environmental expenditure is in fact a national priority. By demonstrating that the existing level of environmental services will soon deteriorate further and significantly unless additional expenditure is incurred, an environmental financing strategy can provide a strong argument in support of this, and should therefore be framed to make this argument explicit.

The analyses in Chapter 17 clearly illustrate that expenditure reductions can only contribute to reduce the financing gap to a very limited extent (approx. one fifth of the gap over a 20 year period) unless very drastic service level reductions are undertaken.

Thus to achieve the modest targets it is sine qua non to raise considerably larger volumes of finance than those implicit in the baseline (which are equivalent to maintaining current finance levels (excl the EBRD and Turkish Government financed projects)). This chapter looks at the possibilities.

3XEOLF VHFWRU

3XEOLF EXGJHW ILQDQFH Historically environmental expenditure has constituted 0.6% to 0.7% of total public expenditure (net of debt service). In addition there have been some public expenditure for water supply capital investment (approximately 0.2% of public expenditure net of debt servicing). Internationally, these are low levels for public expenditure for environment and water supply.

As a result primarily of the Chisinau water and wastewater project, environmental expenditure has to be increased three fold in the years 2000 .- 2002. Environ- mental expenditure will reach 2.0% of public expenditure net of debt service if the public sector is to meet its commitments to the Chisinau water and wastewater project. This demonstrates that the public sector can commit to make resources available when these can leverage international financing for priority water and wastewater projects. Public financing is also necessary to attract concessional international finance for investment projects. 140 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

As a minimum option for public sector financing and thus demonstration of commitment to the targets set for urban water and wastewater, we have made calculations on the basis of a public sector financing equivalent to 2% of total public expenditure net of debt servicing. To maximise the leverage effect we have assumed that the dominant share of public environmental (and water supply) expenditure is investment expenditure. This is equivalent to maintaining the level of public sector financing foreseen for the three coming years. The direct contribution to closing the financing gap is illustrated below.

Table 18.1 Direct effect of public sector financing equivalent to 2% of public expenditure

0'/ PLOOLRQ SULFHV Σ Σ WR WR ,QLWLDO ILQDQFLQJ JDS ,QFUHDVH SXEOLF ILQDQFH WR 2 RI SXEOLF H[ SHQGLWXUH QHW RI GHEW VHUYLFLQJ 5HVXOWLQJ ILQDQFLQJ JDS

Source: Costing model calculations

There is no effect in the initial years as the financing for the Chisinau water and wastewater project is included in the baseline projection of finance. The effect increases as public budgets grow as a result of GDP growth.

The table illustrates that the direct effect is substantial (13% of the total financing gap), but not in itself enough to make a severe dent in the financing gap. Added benefits are coming from the leverage of international funds.

3XEOLF VHFWRU LQVWLWXWLRQDO DFWLRQV It should be recognised that the public sector may also contribute to improving water supply and receiving waters quality in other ways, notably:

• To continue and strenghten macro-economic stabilisation policies and in particular policies to move away from the use of arrears and quasi money as deficit financing mechanisms at all levels of government;

• To continue policies within banking supervision and otherwise to consolidate the Moldovan banking sector;

• To push ahead with policies to transfer ownership and responsibility of water utilities to the Zhudets level;

• To complement such a transfer of ownership with necessary legal changes which will allow for credible enforcement of water bills against households and budget organisations, which unlike industry are widely protected today;

• To complement these policies with realistic budgeting which enables budget organisations to pay their utility bills; 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 141

• To continue successful mobilisation of TA from donors in particular for: - Developing the management capacity of the Apa-Canals so that they effectively deal with the planned corporatisation; and - Pilot projects demonstrating least cost technologies (e.g. rural water supply using hand pumps and modern well technology, replacement of high energy use pumps, and possibly “lagoon” treatment of wastewater discharges).

• To enhance the national Environmental Fund's management capacity. Fur- thermore, in order to make the most of the limited administrative capacity, abolishment of the system of local Environmental Funds should be considered.

• To increase public resources allocated to environmental expenditure through the integration of environmental policy concerns into other policy areas (e.g. agricultural projects could also be used to address soil erosion issues) as also described above in the case of national economic development. The MoETD is already active in this area and should continue this approach.

• To use the UNDP supported Agenda 21 project, which seeks to integrate a strategy for national economic development with environmental issues (and which has high level political support – i.e. from the Prime ministers office).

,QWHUQDWLRQDO 'RQRUV DQG ,),V

*UDQW ILQDQFLQJ IURP GRQRU DJHQFLHV Most development agencies co-operate closely with the Government of Moldova and orientate their assistance programmes towards the priorities set by the Gov- ernment. Environmental protection is not a high priority for the government and as a consequence donor financing in the environmental sector in Moldova is limited. Typically, the different agencies only have a few (if any) projects targeting the environmental sector.

The donor agencies providing environmental assistance in the form of grants to Moldova include the United Nations Development Programme (UNDP), EU’s Technical Assistance for the CIS (TACIS), as well as a few bilateral donors. Ad- ditionally, the World Bank has provided for grant assistance through the Global Environment Facility (GEF).

)RUHFDVW Since forecasts are not available from the donor agencies themselves, the forecast is based on the existing level of grant finance to the environmental sector (see annex 6 for a list of projects).

Table 18.2 presents the forecast for grant financing of environmental projects. The base year is 2000 and it is anticipated that expected that the future level of donor financing for environmental purposes is to continue at the year 2000 level. 142 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Table 18.2 Grant Projection for Environmental Purposes

&RQVWDQW 3ULFHV *UDQWV 0LOOLRQ 0'/ Source: Consultant’s estimate

)LQDQFLQJ RI ZDWHU VXSSO\ DQG ZDVWHZDWHU SURMHFWV As international donors follow government priorities the first step to increasing donor assistance is convincing the government that environmental expenditure really is a national priority. If this is achieved then the most obvious source for support with investments is a concessional loan from a major donor or IFI. In view of the debt service burden which Moldova has, we would like to stress the importance of the loan being highly concessional. An IDA loan is an example of such a loan.

In the calculations we have assumed that it is possible for the Government to leverage its investment resources by a factor 3. Thus for each 1 MDL it is possible to attract a loan of 3 MDL. This is a high leveraging factor, but it does not seem unreasonable in view of the low income-level of Moldova. Initially, we have assumed that international concessional finance will be available for a seven year period 2003 - 2010, following the final payment on the EBRD loan.

The assumed conditions are the following: A 10 years of grace period; 30 years of payback; and an interest rate of 1%.

It is possible to make scenarios, where international financing is available also in the longer term.

Table 18.3 Effect of public sector financing equivalent to 2% of public expenditure and international concessional loan

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Source: Costing model calculations Note: The concessional loan is more than three time the public expenditure shown, because the full concessional loan is additional to the baseline, whereas there is some public expenditure already in the baseline.

The table below provided a "close up on the years relevant for the IDA loan. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 143

Table 18.4 Additional public sector financing and leveraged loan

$GGLWLRQDO SXEOLF EXGJHW )RUHLJQ JUDQWV ,'$ ORDQ /RDQ VHUYLFH 1HW ILQDQFLQJ

'RQRU FRQWULEXWLRQV WR D =JUHHQLQJ= RI WKH LQYHVWPHQW SRUWIROLR Even if they are actively supporting other sectors, donors and IFIs are usually very open to integrating environmental considerations into other projects. Agriculture projects could also address the issue of environmentally sustainable farming practices. Public health projects could also address the issues of polluted rural water supply. The MoETD should therefore initiate a dialogue with donors in order to promote the “greening” of their project portfolio.

5HYHQXHV IURP XVHU FKDUJHV The Government of Moldova has the policy that users should pay the full cost of water and wastewater services. At the same time there are considerable concerns about the ability of households to pay increased water service charges, not least in view of the recent very large increase of energy and heating charges.

However, the analysis above indicates that even a combination of cost saving measures, an increase in public expenditure to a level three times the historical level and a leveraging of concessional loans to the tune of USD 12 million annually over five years are not sufficient to close the financing gap.

Without increased revenues from user charges it will not be feasible to reach the target of an unchanged situation for urban water and wastewater. It should be noted that the way "unchanged situation" has been defined, it will actually imply significant service level improvements for the vast majority of consumers in particular if and when regular energy supply to the country side is restored.

,QFUHDVLQJ XVHU FKDUJHV The main assumptions regarding the increased revenue from user charges is given below:

• User charges are increased from 3.5% of average household incomes to 3.8% in the year 2000

• Collection rates for households increase from 65% to 85%. In Chisinau this happens already in year 2000 as a consequence of the Chisinau Water and Wastewater while in the other towns this happens over a five year period. 144 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

The effects are illustrated below:

Table 18.5 Household user charges billed and collected 2000 - 2020

+RXVHKROGV Σ Σ WR WR %LOOHG KHUHRI ELOOHG LQ &KLVLQDX FROOHFWLRQ UDWH IRU &KLVLQDX FROOHFWHG &KLVLQDX ELOOHG RXWVLGH &KLVDQX FROOHFWLRQ UDWH FROOHFWHG RXWVLGH &KLVLQDX 7RWDO FROOHFWHG UHYHQXH %DVHOLQH UHYHQXH $GGLWLRQDO UHYHQXH

The main increase in the revenue from households is caused by the income growth as the tariff is assumed to be adjusted for keeping the water bill a constant share of the average household income.

The effect is also illustrated in the Figure below:

Source: Consultant’s own calculations Figure 18.1 Backlog without and with increase in collection rate and a slight increase in household tariffs in real terms 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 145

For other consumers the following assumptions are made:

• Cross subsidies are phased out over a twenty year period. By the year 2020 other consumers pay the same unit rates as households.

• The share of non-cash payments is phased out. Initially the share of non-cash payments is reduced from 95% to 50% in five years. In another 15 years the share is reduced to 0% in the year 2020.

This is illustrated in the table below:

Table 18.6 Other consumers user charges billed and collected 2000 - 2020

2WKHU FRQVXPHUV Σ Σ WR WR %LOOHG KHUHRI LQ &KLVLQDX FROOHFWLRQ UDWH &KLVLQDX 2 2 2 2 2 FROOHFWHG &KLVLQDX FROOHFWLRQ UDWH RXWVLGH &KLVLQDX 2 2 2 2 2 FROOHFWHG RXWVLGH &KLVQDX 7RWDO FROOHFWHG 6KDUH LQ FDVK 2 2 2 2 2 &DVK FROOHFWHG 1RQFDVK FROOHFWHG 9DOXH RI QRQFDVK LQ 2 2 2 2 2 2 9DOXH RI FROOHFWHG QRQFDVK 9DOXH RI FROOHFWHG UHYHQXH %DVHOLQH UHYHQXH $GGLWLRQDO UHYHQXH

Initially additional revenue is generated as a result of the increased collection rate and increased share of cash payments. In the long run the removal of cross - subsidies neutralise the positive effects and the net effect on revenue is a slightly smaller revenue. However, it should be noted that a severe reduction of cross subsidies is likely to be necessary to achieve the assumed increases in collection rate and share of cash payments.

The net effect is illustrated in the figure below: 146 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: Consultant’s own calculations Figure 18.2 Backlog without and with increased revenues from non-household consumers The effects may be summarised in the table below:

Table 18.7 Effect of increased user revenues

7\SH RI RSWLRQ 0LOOLRQ 0'/ IL[HG SULFHV Σ Σ WR WR ,QLWLDO ILQDQFLQJ JDS ,QFUHDVH LQ KRXVHKROG UHYHQXHV ,QFUHDVH LQ UHYHQXHV IURP RWKHU FRQVXPHUV 5HVXOWLQJ ILQDQFLQJ JDS

Source: Costing model calculations.

The table illustrates that increased revenues from users primarily through in- dexation of charges to GDP growth, higher collection rates and more cash payment can give a very significant contribution to closing the financing gap in the medium and long term. 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 147

3ULYDWH VHFWRU GHEW ILQDQFH As noted previously in this report, in the short and medium term there is limited scope for private sector debt financing. In the case of investments with a very short pay back period there may be (limited opportunities), notably:

• The establishment of a credit line for environmental investments which could benefit from interest rates and conditions that are more generous than on the local Moldovan market. Both the World Bank and the EBRD have experience in supporting such types of credit lines.

• To encourage such "win-win" investments the MoETD should seek to provide these investment incentives – most obviously by raising pollution charges (the present levels are low) and by making sure that they are effectively enforced - which they are not today.

The volume of investments is likely to be small and has not been included in the calculations. 148 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\ 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 149

6FHQDULR DQDO\VHV The options discussed above have been assessed in terms of their effect on either supply of or the demand for finance. The results are summarised in this chapter. The chapter considers the following scenarios:

• User pays scenario. This scenario brings significant increases in revenues from user charges as well as cost savings and more realistic standards for wastewater treatment.

• The additional financing scenario. This scenario combines the user pays scenario with additional public budget funding and matching (leveraged) concessional financing in the form of a USD 100 million loan over seven years.

This chapter illustrates the effect from the various options analysed by means of comparing the resulting backlog of maintenance with the initial backlog of maintenance.

&RPELQLQJ VXSSO\ DQG GHPDQG RSWLRQV Above the different policy options have been analysed. As it might be difficult to get the full effect of some of the options or in any case a phase in period is needed, a combination of measures are required to achieve closing of the financing gap.

Although it is basically a political decision to when the financing gap should be closed implementation of any of the options will take time. Below we present first a scenario, "the user pays scenario" which represent realistic measures and which will achieve a closing of the gap in a bit more than 10 years and a fully restored system by the end of the 20-year period.

Regarding cost saving measures, the following have been assumed:

• cost savings are achieved through the following measures: - replacement of pumps; - extended coverage with meters; - water savings campaigns; - systematic programme for pipe replacement. 150 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Regarding more realistic wastewater treatment standards the following has been assumed:

• Cost savings are achieved through: - change emission requirements to comply with EU requirements (no cost saving); - Mechanical treatment only in towns of less than 10, 000 inhabitants

Regarding user revenues, the following have been assumed:

• implementation of the institutional actions listed in Section 18.1.2; • increase user charges from 3.5% of average household income to 3.8%; • phase out cross subsidisation over a 20 year period; • increase collection rate for both households and other consumers to 85%; • increase share of cash payment to 100% over a 20 year period; • foreign grants at an annual level of 33 MDL.

The results of the "user pays" scenario, which combine both demand and supply measures, indicate that the infrastructure will continue to deteriorate. However, in 10 - 12 years the financing gap could be closed and that it will be possible to reno- vate the system back to the current state within a subsequent 15 - 20 year period. The result in terms of the backlog is illustrated below.

Table 19.1 The "User pays" scenario

PLOOLRQ 0'/ Σ Σ IL[HG SULFHV WR WR ,QLWLDO ILQDQFLQJ JDS (QHUJ\ VDYLQJV &XUUHQW VHUYLFH ::73 7RWDO DGGLWLRQDO XVHU FKDUJHV RI ZKLFK $GGLWLRQDO KRXVHKROGV $GGLWLRQDO QRQKRXVHKROG $GGLWLRQDO IRUHLJQ JUDQWV 5HVXOWLQJ JDS %DFNORJ Source: Costing model calculations 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 151

Source: Consultant’s calculations using costing model Figure 19.1 Backlog with target expenditure and baseline supply of finance versus user pays scenario If the financing gap should be closed within a much shorter time frame, additional measures are needed. This could be:

• more financing from public budgets; • and a concessional loan.

This is included in the "additional finance" scenario.

Specifically it has been assumed that the following finance is made available:

• Public environmental expenditure is increased to 2% of total public expenditure (net of debt service)

In itself this would contribute to reducing the financing gap as illustrated below 152 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: Consultant’s calculations using costing model Figure 19.2 Backlog with target expenditure and baseline supply of finance versus additional public finance • A concessional loan of MLD 651 million (USD 62 million) over five years 2003 - 2007

In itself this would contribute to reducing the gap as illustrated below 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJ 153

Source Consultant’s calculations using costing model Figure 19.3 Backlog with target expenditure and baseline supply of finance vs. USD 62 million concessional loan The effect of using public finance to leverage a concessional loan in addition to the actions taken under the "User pays" scenario is illustrated in the table and figure below.

Table 19.2 The "additional finance scenario"

2000 2003 2004 2005 2006 2007 2015 2020 Financing gap in "user pays scenario" 220 176 153 128 114 39 -54 -99 Additional public budget 013162123274051 IDA loan 01011121311441630 0 Loan service 000000-20-38 Net financing 0 114 128 152 167 190 20 13 New financing gap 220 62 25 -24 -53 -151 -74 -113 Backlog with additional financing 220 657 682 658 606 454 174 -278 Source: Costing model calculations 154 0ROGRYDÃ%DFNJURXQGÃ$QDO\VHVÃIRUÃWKHÃ(QYLURQPHQWDOÃ)LQDQFLQJÃ6WUDWHJ\

Source: Consultant´s calculations using costing model Figure 19.4 Backlog with target expenditure and baseline supply of finance versus "additional finance" scenario Combining all actions in the "additional financing scenario", the gap is closed in 5 years and the backlog of maintenance which then amounts to about 650 million MDL is then removed in approximately 18 years. Appendix 1: Composition of advisory committee Appendix 1: Members of advisory committee

Mr Capcelia Ministry of Environment, Minister of the Environment Dr. Jolondcovschi Ministry of Environment, First Deputy Minister Mr Isac Ministry of Environment, Head of Environmental Policy Division Mr Zubarev Ministry of Economics Mrs Tatiasna Arkan Ministry of Finance Mr Michael Jacobsen COWI Lyngby Mr Martijn Quinn COWI Lyngby Mr Ulrik Dan Weuder Dancee Appendix 2: Pricing data for cost analysis Appendix 2: Pricing data for costing analysis

Prices units Local price, Local price, International year 2000 year 2000 price, 2000 local currency/ EUR/unit EUR/ unit unit Opportunity price of land m² 1.50 0.13 1.0 Average price of construction materials - 6.00 0.0 1.0 Average wages of a construction worker month 416 34. 2,00 Average administrative salary month 390 32. 3,000 Electricity border price KWh 0.65 0.5 0.5 Average price of water treatment chemicals kg 2.20 0.18 1.0

Average salary at public utilites month 500 41.67 3,00 Price of steam coal tons 231.3 Price of mazut tons 553.6 Price of natural gas '000 m3 600.0 Appendix 3: Macro-economic baseline Macro economic baseline - Appendix 3

Indicator/year 1998 Baseline 1999 estimate 2000 2001 2002 2003 2004 Real GDP growth -8,60% -2,90% 0% 1,20% 2,50% 3,50% 4,50% Population growth (%) 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% Nominal GDP per capita 2.418 3.263 3.916 4.359 4.826 5.344 5.920 Share of salaries in GDP 24% 24% 25% 26% 27% 28%

Indicator/year 2005 2006 2007 2008 2009 2010 2011 Real GDP growth 5% 5% 5% 5% 5% 5% 5% Population growth (%) 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% Nominal GDP per capita 6.526 7.195 7.933 8.746 9.642 10.631 11.720 Share of salaries in GDP 29% 30% 31% 32% 33% 34% 35%

Indicator/year 2012 2013 2014 2015 2016 2017 2018 2019 2020 Real GDP growth 5% 5% 5% 5% 5% 5% 5% 5% 5% Population growth (%) 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% Nominal GDP per capita 12.922 14.246 15.707 17.316 19.091 21.048 23.206 25.584 28.207 Share of salaries in GDP 36% 37% 38% 39% 40% 41% 42% 43% 44% Appendix 4: Maps of Moldova

Appendix 5: Overview of revenue generating instruments and data on projects by international finance institutions and donors Overview of revenue generating instruments1

Instrument Principles of calculation Institutions responsible for Accrued to Committed to collection environmental expenditure? Tax on the use of soil Standard and excess rate (set in annual Local offices of State Fiscal Service Local budgets (since 1996). Makes Yes, in principle – for State budget) up 35-40% of local revenue. part of the total revenue (30%) Tax on the use of water Standard and excess rate (set in annual Local offices of State Fiscal Service Local budgets, Apele Moldovei, Yes, in principle State budget) Deviations from the Sewerage Enterprises – distribution standard rate for different groups. used to be set by State Budget? Tax on the use of mineral resources Calculation of costs in individual cases Local offices of State Fiscal Service Local budgets Yes. In principle – Standard and excess rate (set in annual State budget)? Tax on the use of forests Varying rates depending on type of Local offices of State Fiscal Serv- Shared equally between local Yes. In principle wood. Rates set in Government Deci- ice/Forestry Department budgets and forestry department or sion 532, 1992. all goes the forestry department? Pollution charge – water Standard and excess rate (ten times District Environmental Agencies Local environmental fund (30% to Earmarked for environ- the standard) for discharge of waste- (District branch of the Environ- National Environmental Fund). mental projects. water. Rates are specific to regions. mental Inspectorate) Enterprises exempted in the year of investment in water treatment facilities. Pollution charge – waste Standard and excess rate for discharge District Environmental Agencies Local environmental fund Yes of waste. Rates may be adjusted lo- (District branch of the Environ- cally. mental Inspectorate) Pollution charge – air Calculated locally for stationary District Environmental Agencies Local environmental funds. Yes sources based on standard rates per (District branch of the Environ- pollutant. Excess rate (five times the mental Inspectorate) standard). Vehicle records for enterprises. Product charge on fuel Charge added to the price of petrol ? Local or national environmental ? fund? Charge on imported fuel A percentage of the import price. State Customs Department National Environmental Fund. (main Yes source of income) Compensation for environmental District Environmental Agencies Local environmental fund (30% to Yes damage (District branch of the Environ- National Fund) mental Inspectorate)

1 Source: UNECE Report + interviews Instrument Principles of calculation Institutions responsible for Accrued to Committed to collection environmental expenditure? Fines for environmental damage District Environmental Agencies Local Environmental Fund (30% to Yes (District branch of the Environ- National Fund) mental Inspectorate) Project Details

Donor Project Title Start End Grant/loan Amount Currency

UNDP Building Capacity for Implementation of the NEAP 1997 1999 Grant 100.000,00 USD UNDP/GEF National Communication UN FCCC 1998 2000 Grant 325.000,00 USD UNDP/Multilateral Fund of the Refrigerant Recovery and Recycling Programme 1999 1999 Grant 254.000,00 USD Montreal Protocol UNDP/Multilateral Fund of the Establishment of a National Ozone Unit 1999 2000 Grant 80.000,00 USD Montreal Protocol UNDP/Multilateral Fund of the Training in Monitoring and Controlling of ODS 1999 1999 Grant 77.000,00 USD Montreal Protocol UNDP/Multilateral Fund of the Training of Trainers in Refrigeration 1999 1999 Grant 66.000,00 USD Montreal Protocol UNDP Agenda 21 for Moldova 1999 2000 Grant 210.000,00 USD UNDP/GEF Country Programme and project preparation for implementation 1997 1997 Grant 80.000,00 USD of Montreal Protocol UNDP/GEF Environmental Programme for the Danube River Basin 1996 1998 Grant 43.000,00 USD Tacis Accident emergency warning system, monitoring laboratory, and 1998 2000 Grant 1.000.000,00 Ecu information management for the Ukranian and Moldovan parts of the Danube river basin Tacis Selected Actions for Moldova and Ukraine for the Danube River 1999 2000 Grant 1.000.000,00 Ecu Basin Tacis Support to the Regional Environmental Centre in Moldova 1999 2000 Grant 1.000.000,00 Ecu Tacis Prut River Management 1998 2000 Grant 2.500.000,00 Ecu Tacis Prut River Tributaries: Environmental Review, protection, strate- 2000 2002 Grant 1.300.000,00 Ecu gies and options WB/GEF National Environmental Action Plan 1994 1995 Grant 200.000,00 USD WB/GEF Rural Water quality study 1996 1997 Grant 200.000,00 USD WB/GEF Biodiversity Strategy for Moldova 1999 2000 Grant 125.000,00 USD Project Details

Donor Project Title Start End Grant/loan Amount Currency

WB/GEF Project Preparation - Dniester River Boidiversity Conservation 1999 2000 Grant 25.000,00 USD UNECE Environmental Performance Review of Moldova 1997 1997 Grant 200.000,00 USD OECD Developing NEAP Indicators (pilot project) 1996 1996 Grant 30.000,00 USD USAID Land resources environmental policy and technology project 1995 1997 Grant 2.500.000,00 USD MoE Finland National Strategy for Sustainable Forest Management 1999 2000 Grant 120.000,00 USD DANCEE/TACIS TA input to Chisinau Water Services Project 1997 2000? Grant 2.900.000,00 USD Total Grants 14.335.000,00 USD/ECU 2

EBRD Chisinau Water Services Rehabilitation Services 1997 2000? Loan 22.750.000,00 USD TICA Rural Water Supply 1997 2000 Loan 35.000.000,00 USD Total Loans 57.750.000,00 USD

2 Assuming that exchange rate USD/ECU is 1. Appendix 6: Employment structure by sector Appendix 6: Employment structure by sector

Dependent Employment by Sector of Activity Excluding Transnistria.

Number of employees, thousand Structure, % 1995 1996 1997 1998 01-09, 1998 01-09,1999 1995 1996 1997 1998 01-09, 199801-09,1999 TOTAL 1286.8 1210.1 1126.6 1033.2 1044.3 866.7 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture, hunting and related services 560.3 523.4 474.0 411.2 415.9 297.4 43.5 43.3 42.1 39.8 39.8 34.3 Manufacturing industry 185.5 158.0 140.5 125.1 127.4 110.7 14.4 13.1 12.5 12.1 12.2 12.8 Electric energy, gas & w ater supply 20.9 19.7 20.3 22.7 22.5 22.4 1.6 1.6 1.8 2.2 2.2 2.6 Construction 50.8 42.4 34.7 29.8 30.2 26.4 3.9 3.5 3.1 2.9 2.9 3.0 Wholesale and retail trade 49.0 57.3 48.8 40.6 42.5 33.9 3.8 4.7 4.3 3.9 4.1 3.9 Transport, w arehousing & communications 48.5 63.2 58.5 56.3 57.0 51.6 3.8 5.2 5.2 5.4 5.5 6.0 Financial activity 8.0 9.8 8.6 8.1 8.2 7.4 0.6 0.8 0.8 0.8 0.8 0.8 Real estate activity 33.2 26.7 26.6 27.9 28.1 27.1 2.6 2.2 2.4 2.7 2.7 3.1 State administration 26.8 29.3 48.0 52.0 51.8 48.7 2.1 2.4 4.3 5.0 5.0 5.6 Education 154.8 146.9 145.3 142.5 142.8 134.4 12.0 12.1 12.9 13.8 13.7 15.5 Health & social services 93.9 91.2 88.8 86.7 87.1 80.4 7.3 7.5 7.9 8.4 8.3 9.3 Source: Department of Statistical and Sociological Analysis. Appendix 7: Household income and expenditure Appendix 7: Household income and expenditures

DEPARTMENT OF STATISTIC AND SOCIOLOGICAL ANALYSIS OF THE REPUBLIC OF MOLDOVA

The Budget of Household in the 3rd Quarter of the 1999

(Statistical bulletin)

Chisinau - 1999 The Budget of Household in the 3rd Quarter of the 1999 (Statistical bulletin)

The Department of Statistical and Sociological Analysis has generalized the data with regard to the study of the households (families ) budgets in the 3rd Quarter of the year 1999. The study was performed based on the representative sample of 1549 households(families) using mathematical and statistical methods complying with the international ones. The data related to the incomes and expenditures have been obtained on the bases of daily registrations made by housekeepers (filling in specials statistical formats) being guided/advised/assisted by interviewers and controllers from the regional statistical offices who are responsible for the accuracy of the data collected at the household level. The data from the present bulletin are presented as months average (medium)/person from the sample. Taken as a medium value one studied household (family) was composed of 2.87 persons, 2.62 – for urban settlements and 3.04 – for rural settlements. The revenues and expenditures have been calculated from the current value of the period covered by the study. The data has been calculated without taking Transnistria into consideration. Table 1. The Characteristics of the Households

July – September 1999 Number of Households % By the place of living: - urban 620 40.0 - rural 929 60.0 Total 1549 100.0 By the size of Household: - hh of 1 person 336 21.7 - hh of 2 persons 354 22.9 - hh of 3 persons 330 21.3 - hh of 4 persons 323 20.9 - hh of 5 persons 134 8.7 - hh of 6 persons 72 4.6 Total 1549 100.0 By type of HH - hh of 1 person 336 21.7 - married couple with no children 264 17.0 - married couple with up to 18 years old children 426 27.5 - one parent with up to 18 years old children 68 4.4 - other hh with up to 18 years old children 256 16.5 - other hh with no children 199 12.8 Total 1546 100.0 By the main source of income: income from wages 413 26.7 income from agriculture 712 46.0 income from individual activity 47 3.0 income from the indemnities (social pay) 172 11.1 other incomes 205 13.2 Total 1549 100.0 Table 2. Global Income of Household by the place of living monthly average / person Total Urban Rural July-September July-September July-September 1998 1999 1998 1999 1998 1999 Net Income – total (I+II) 173.0 190.1 217.0 269.1 148.5 144.9 I. Available Income 118.3 142.8 140.4 186.4 106.0 117.8 1.1 Income from the waged activity 46.0 57.5 83.3 116.2 25.2 23.9 1.2 Income from not waged activity 43.9 49.7 14.0 19.3 60.5 67.2 1.2.1 Income from agricultural activity 41.2 44.1 9.7 10.2 58.8 63.6 1.2.2 Income from the non-agricultural activity 0.7 3.1 0.9 3.6 0.5 2.8 1.2.3 Income from trade 1.5 2.2 3.1 5.3 0.6 0.4 1.2.4 Income from fishing, hunting, collecting 0.5 0.3 0.3 0.1 0.6 0.4 1.3 Income from the property 0.5 0.4 1.4 1.0 0.0 0.0 1.4 Total rents 0.5 0.4 1.3 1.0 0.0 0.0 1.5 Indemnity (social pays) from which: 13.3 13.6 16.3 17.8 11.7 11.2 1.5.1 Pensions (alimony) 12.8 12.9 15.8 16.3 11.1 11.0 1.5.2. Unemployment Indemnities 0.0 0.0 0.0 0.1 0.0 0.0 1.6 Other current indemnity 0.5 0.5 1.2 .3 0.0 0.1 1.7 Other current transfers from which: 13.7 20.7 22.9 29.9 8.6 15.5 1.7.1 Presents received 10.9 13.5 21.9 29.2 4.8 4.5 II. Incomes from savings 54.7 47.3 76.6 82.7 42.5 27.1 2.1 Input – financial resources 44.8 45.9 69.2 79.1 31.1 26.8 2.1.1 Sum withdrew from the banks 0.6 0.2 0.7 0.0 0.5 0.2 2.1.2 Credits and borrowings received 10.7 8.1 18.6 14.0 6.3 4.7 2.1.3 Reimbursements received from persons 2.1 0.8 2.7 1.5 1.7 0.3 2.1.4 Balance in cash as of the beginning of the month 31.4 36.9 47.3 63.6 22.6 21.6 2.2 Input – non-financial resources 10.0 1.5 7.4 3.6 11.4 0.2 2.2.1 Selling of goods and products of long term use 2.7 1.5 7.4 3.6 0.1 0.2 2.2.2 Selling of non-producing immobile properties 7.2 0.0 0.0 0.0 11.3 0.0 2.2.3 Selling of productive fixed assets 0.0 0.0 0.0 0.0 0.0 0.0 2.2.4 Selling of land 0.0 0.0 0.0 0.0 0.0 0.0 Table 4. Global Income of the Household by place of living by quintile of the available income, monthly average / person July-September 1998 July –September 1999 Total Urban Rural Total Urban Rural lei % lei % lei % lei % lei % lei % Quintile 1 NET INCOME – TOTAL 86.29 100.00 123.64 100.00 62.32 100.00 82.34 100.00 118.77 100.00 64..76 100.00 Available Income 20.94 24.27 15.80 12.78 24.23 38.88 30.88 37.50 24.76 20.85 33.83 52.24 Income from the waged activity 2.67 3.09 3.71 3.00 2.00 3.21 4.65 5.65 9.83 8.28 2.15 3.32 Income from agricultural activity 11.57 13.41 3.38 2.73 16.83 27.01 16.66 20.23 2.88 2.42 23.31 35.99 Income from individual activity 0.30 0.35 0.32 0.26 0.28 0.45 0.37 0.45 1.14 0.96 0.00 0.00 Income from the indemnities (social pay) 2.10 2.43 2.43 1.89 1.94 3.11 2.66 3.23 4.64 3.91 1.70 2.63 Other Incomes 4.30 4.98 6.05 4.89 3.18 5.10 6.54 7.94 6.27 5.28 6.67 10.30 Incomes from savings 65.35 75.73 107.84 87.22 38.09 61.12 51.46 62.50 94.01 79.15 30.93 47.76 Income from financial resources 58.30 67.56 89.80 72.63 38.09 61.12 50.98 61.91 92.54 77.92 30.93 47.76 Income from non-financial resources 7.05 8.17 18.04 14.59 0.00 0.00 0.48 0.58 1.47 1.24 0.00 0.00 Quintile 2 NET INCOME – TOTAL 126.23 100.00 101.71 100.00 134.15 100.00 111.79 100.00 169.42 100.00 86.21 100.00 Available Income 53.52 42.40 55.46 54.53 52.92 39.45 69.19 61.89 70.37 41.54 68.67 79.65 Income from the waged activity 11.40 9.03 26.03 25.59 6.70 4.99 18.75 16.77 35.05 20.69 11.51 13.35 Income from agricultural activity 30.26 23.97 7.66 7.53 37.55 27.99 27.71 24.79 6.70 3.95 37.04 42.96 Income from individual activity 0.02 0.02 0.16 0.16 -0.03 -0.02 1.82 1.63 3.87 2.28 0.92 1.07 Income from the indemnities (social pay) 6.35 5.03 11.30 11.11 4.75 3.54 7.59 6.79 12.56 7.41 5.38 6.24 Other Incomes 5.49 4.35 10.31 10.14 3.95 2.94 13.32 11.92 12.19 7.20 13.82 16.03 Incomes from savings 72.71 57.60 46.25 45.47 81.23 60.55 42.60 38.11 99.05 58.46 17.54 20.35 Income from financial resources 32.63 25.85 45.05 44.29 28.63 21.34 41.80 37.39 96.61 57.02 17.47 20.26 Income from non-financial resources 40.08 31.75 1.20 1.18 52.60 39.21 0.80 0.72 2.44 1.44 0.07 0.08 Quintile 3 NET INCOME – TOTAL 119.9 100.00 141.76 100.00 108.40 100.00 137.26 100.00 164.28 100.00 125.65 100.00 Available Income 87.21 72.74 89.08 62.84 86.24 79.56 104.04 75.80 105.56 64.26 103.39 82.28 Income from the waged activity 24.70 20.60 42.09 29.69 15.55 14.35 30.98 22.57 57.39 34.93 19.62 15.61 Income from agricultural activity 40.79 34.02 13.92 9.82 54.94 50.68 46.59 33.94 12.88 7.84 61.09 48.62 Income from individual activity 1.17 0.98 1.41 0.99 1.04 0.96 0.95 0.69 2.00 1.22 0.49 0.39 Income from the indemnities (social pay) 11.74 9.79 17.87 12.61 8.52 7.86 11.49 8.37 20.63 12.56 7.56 6.02 Other Incomes 8.81 7.35 13.79 9.73 6.19 5.71 14.03 10.22 12.66 7.71 14.63 11.64 Incomes from savings 32.69 27.26 52.68 37.16 22.16 20.44 33.22 24.20 58.72 35.74 22.26 17.72 Income from financial resources 28.66 23.90 42.01 29.63 21.63 19.95 32.57 23.73 56.56 34.43 22.26 17.72 Income from non-financial resources 4.03 3.36 10.67 7.53 0.53 0.49 0.65 0.47 2.16 1.31 0.00 0.00 July-September 1998 July –September 1999 Total Urban Rural Total Urban Rural lei % lei % lei % lei % lei % lei % Quintile 4 NET INCOME – TOTAL 175.64 100.00 208.21 100.00 152.82 100.00 203.67 100.00 222.00 100.00 187.98 100.00 Available Income 136.38 77.65 137.68 66.13 135.47 88.65 160.79 78.95 161.51 72.75 160.18 85.21 Income from the waged activity 48.49 27.61 70.26 33.74 33.24 21.75 62.02 30.45 89.19 40.18 38.76 20.62 Income from agricultural activity 50.84 28.95 13.61 6.54 76.92 50.33 48.66 23.89 10.57 4.76 81.29 43.24 Income from individual activity 1.37 0.78 3.41 1.64 -0.06 -0.04 7.06 3.47 13.34 6.01 1.69 0.90 Income from the indemnities (social pay) 20.78 11.83 30.08 14.45 14.26 9.33 19.82 9.73 22.45 10.11 17.56 9.34 Other Incomes 14.90 8.48 20.32 9.76 11.11 7.27 23.23 11.41 25.96 11.69 20.88 11.11 Incomes from savings 39.26 22.35 70.53 33.87 17.35 11.35 42.88 21.05 60.49 27.25 27.8 14.79 Income from financial resources 37.71 21.47 66.87 32.12 17.28 11.31 40.20 19.74 54.67 24.63 27.80 14.79 Income from non-financial resources 1.55 0.88 3.66 1.76 0.07 0.05 2.68 1.32 5.82 2.62 0.00 0.00 Quintile 5 NET INCOME – TOTAL 365.13 100.00 388.43 100.00 335.08 100.00 456.04 100.00 495.42 100.00 391.40 100.00 Available Income 301.40 82.55 300.87 77.46 302.08 90.15 375.00 82.23 393.74 79.48 344.23 87.95 Income from the waged activity 158.23 43.34 200.72 51.67 103.42 30.86 198.93 43.62 267.46 53.99 86.49 22.10 Income from agricultural activity 59.78 16.37 10.07 2.59 123.89 36.97 65.48 14.36 11.09 2.24 154.68 39.52 Income from individual activity 7.72 2.11 10.46 2.69 4.19 1.25 17.36 3.81 16.48 3.33 18.80 4.80 Income from the indemnities (social pay) 27.54 7.54 17.65 4.54 40.30 12.03 31.87 6.99 23.60 4.76 45.43 11.61 Other Incomes 48.13 13.18 61.97 15.95 30.28 9.04 61.36 13.45 75.09 15.16 38.83 9.92 Incomes from savings 63.73 17.45 87.56 22.54 33.00 9.85 81.04 17.77 101.68 20.52 47.17 12.05 Income from financial resources 62.09 17.00 84.64 21.79 33.00 9.85 78.12 17.13 96.99 19.58 47.17 12.05 Income from non-financial resources 1.64 0.45 2.92 0.75 0.00 0.00 2.92 0.64 4.69 0.95 0.00 0.00 Appendix 8: Bibliography 1

Appendix 8: Bibliography Department of The Budget of Households in the 3rd Quarter of 1999. Statistical Bulletin Statistics, Chisinau (1999)

Department of Statistic Yearbook of the Republic of Moldova – 1997. Statistics, Chisinau, (1998)

Department of Statistic Yearbook: the Republic of Moldova – 1994. Statistics, Chisinau, (1995)

EBRD EBRD Project in Moldova (1991-1998)

EBRD/DEPA Chisinau Water Services Rehabilitation Project. Regia Apa Canal. Final Report, June 1998. Rambøll-Krüger Consult Joint Venture.

International Republic of Moldova: Recent Economic Developments. IMF Staff Country Monetary Fund Report No 99/110, September 1999. (1999)

Ministry of Economy Social and Economic Development of the republic of Moldova. and Reform, Annual Edition. Chisinau (1996, 1997, 1998)

OECD, Phare/Tacis Sourcebook on Environmental Funds in Economies in Transition / A regional (1999) Overview and Surveys of Selected Environmental Funds in Central and Eastern Europe and the New Independent States, October 1999

State Ecological Annual report. Chisinau, 1999 Inspectorate (1998)

TACIS (1998) State of the Environment: Country Overview –Moldova. Report prepared for the fourth pan-European conference of environment ministers in Aarhus, Den- mark, June 1998.

TACIS, Economic Trends: Quarterly Edition, Moldovan Government, European Exper- Chisinau, tise Service (1998, 1999)

TACIS, Moldova Summary of Projects Under Implementation. December 1999. (1999) 2

TACIS, Moldova Indicative Programme 1996-1999. Http:// europa.eu.int/comm/dg1a/tacis/country_closeup/moldova/ cc_moldo_indic.htm

TACIS Internet Action Programme 1999. Moldova. Programme information taken from the Information (1999) internet. Http:// europa.eu.int/comm/dg1a/tacis/country_closeup/moldova/ cc_moldo_action99.htm

TACIS Internet Partnership & Cooperation Agreement. Facts and Figures, Moldova. Informa- Information (1999) tion on Partnership & Cooperation Agreement / Interim Agreement taken from the internet. Http:// europa.eu.int/comm/dg1a/tacis/country_closeup/moldova/ cc_moldo_pca.htm

Republic of Moldova - Public Investment Programme for the Years 1998 – 2000.

UNDP (1998) National Human Development Report. Republic of Moldova.

UNDP (August 1999) Development Cooperation. Republic of Moldova, 1998 Report.

UNDP/Moldova The Mechanisms of Functioning of the National Environmental Fund of the (1999) Republic of Moldova. UNDP/Moldova “Building Capacity for the Implemen- tation of the NEAP in Moldova” Project, 1999

UNDP/Moldova The Role of Local Authority in Environmental Protection and Management. (1999) UNDP/Moldova “Building Capacity for the Implementation of the NEAP in Moldova” Project, 1999

UNDP/Moldova Guideline on the Execution of the State Environmental Control. (1999) UNDP/Moldova " Building Capacity for the Implementation of the NEAP in Moldova” Project, 1999

UN ECE (1998) Environment Performance Review: Republic of Moldova,

UN ECE (1999) First Interim Report on Follow-up to the CEP Recommendations fron the EPR of Moldova. Prepared by the EPR Team of ECE. 8 September 1999.

USAID (1999) Technical Assistance to Moldova, November 1999.

World Bank (1999) Moldova Poverty Assessment. A world Bank Country Study. ISBN: 0-8213-4477-3. ISSN: 0253-2123. November 1999.

World Bank (1999) Memorandum of the President of the International Bank for Reconstruction and Development, The International Development Association and the International Finance Corporation to the Executive Directors on a Country Assistance Strat- egy for the Republic of Moldova. April 7, 1999 Country Department VII, Europe and Central Asia Region. Report NO. 18896.MD. 3

World Bank (1999) Moldova: World Bank Cooperation Progam. November 1999. Active IBRD/IDA Projects

World Bank (1997) Study on the Quality of Rural Drinking Water. Volume II: Improvement of Drinking Water Quality and Reduction of Groundwater Pollution, Final Report. Chisinau, July 1997.

World Bank (1995) National Environmental Action Plan of the Republic of Moldova :

National Environmental; Strategic Action Programme of the Republic of Moldova for the Years 1995-2010, Chisinau, 1995

Monetary Policy of National Bank of Moldova as for 1999 year. The decision of the Administrative Council of the MNB N 433 as of 31 December 1998.

The Decision N 9 as of 15 December 1998 of the National Agency for Energy Use of the Republic of Moldova

Development of Common Environmental Policies in the Newly Independent States (NIS) and Mongolia Project / Republic of Moldova. Final Report, Octo- ber 1998.

The State of Environment and Population's Health in the Republic of Moldova: First National Report presented to the 3rd Ministerial Conference "Environment and Health" (London 16-18 June 1999). Chisinau, "Stiinta" 1999

Department of Sta- Statistic Yearbook of the Republic of Moldova – 1993 tistic, Chisinau, (1994)

Department of Statistic Yearbook of the Republic of Moldova – 1995 Statistic, Chisinau, (1996)

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Water Code, 1993

Law on Environmental protection, 1993 Nr 1515 XII

Potable Water Law, 1999 Nr 272-XIV

Law on Taxes on Environmental Pollution, 1998 Nr 1540-XIII Appendix 9: List of meetings and persons met Appendix 9: List of meetings and persons met

Thursday, 9 December 1999

• Mr. Alexandru Jolondcovschi, First Deputy Minister of Environment, Project Coordinator; • Project team working meeting (Martijn Quinn, Maria Murasheva, Andrei Mukhin, Victore Zubarev, Valentin Bordeniuc, Corneliu Busuioc)

Friday, 10 December 1999

• Mr. Arcadie Capcelea, Minister of Environment; • Mr. Petru Cocarta, Director of the Center of Environmental Monitoring, National Institute of Ecology; • Mrs. Tamara Guvir, Water Quality Specialist, Ministry of Environment; • Mrs. Tatiana Tugui, Solid Wastes Management Specialist, Ministry of Environment; • Mrs. Liudmila Morduhaeva, Air Quality Specialist, Ministry of Environment • Mr. Sergiu Magdyl, Biodiversity Conservation and Protected Area Specialist; Deputy Head of Environmental Polisy Division, Ministry of Environment; • Mrs. Tatiana Plesco, Environmental Economics Specialist, Ministry of Environment, Environmental Policy Division • Alexandr Guriev, GIS Specialist

Monday, 13 December 1999

• Mrs. Veronica Furnica, Head of center of Observation Upon the Environment, Hidrometeo Service; • Victor Zubarev, Head of Environmental Economy Division, Ministry of Economy and Reforms; • Victor Egorov, Deputy Head of the State Environmental Inspectorate; • Andrei Isac, Head of Environmental Policy Division, National NEAP Co- ordinator, Ministry of Environment;

Tuesday, 14 December 1999

• Mrs. Zinaida Grecianii, Head of Budget Department, Ministry of Finace and Mrs. Vasilita, • Mr. Maxim Kakareka, analyst, EBRD; • Mrs. Jana Tafi, Head of Social and Environmental Statistics, State Department of Statistics; • Mr. Andrei Isac

Wednesday, 15 December 1999

• Mr. Luc Bequer, Head of Tacis PCU • Mr. Veaceslav Scobioala, Head of TA Co-ordination Unit, Ministry of Economy and Reforms, Department of Foreign Economic Relations; • Mr. Soren Tejno, UNDP/Moldova resident representative; • Mrs. Margareta Petrushevschi, UNDP Programme Officer; • Mr. Anatol Gobjila, the World Bank Resident Mission; • Mr. Anatolii Krachilov, Head of Credit Division, “VICTORIABANK” JSC. DATASHEET

Publisher: Ministry of Environment and Energy, Danish Environmental Protection Agency, Strandgade 29, DK-1401 Copenhagen Telephone int + 45 32660100 Telefax int + 45 32660479 http://www.mst.dk

Year of publication: 2000

Title: Moldova. Background Analyses for the Environmental Financing Strategy

Author(s): Ms Malene Sand Jespersen, Mr. Michael Jacobsen, Mr Michael Munk Sørensen, Mr Martijn Quinn

Performing organisation(s): COWI AS

Abstract: The purpose of the municipal water and wastewater financing strategy for the Republic of Moldova is to determine a realistic, agreed and affordable service and to demonstrate how environmental expenditure can be financed. The water and wastewater financing strategy has been developed in an iterative process in a dialogue with the finance, environmental and other relevant authorities. This report presents the final background analyses by the consultant.

Terms: Moldova, NIS, water utilities; water, wastewater; wastewater treatment; national environmental action plan (NEAP); environmental financing strategy; environmental policy analysis; water tariffs; international finance

Edition closed: August 2000

Number of pages: 222 Format: A4

Number of copies: 100 (second impression)

Printed by: Kannike Graphic A/S

Reproduction is authorised provided the source is acknowledged. Printed on 100% recycled paper Ministry of Environment, Denmark