UNITED NATIONS E
Economic and Social Working Paper No. WGSO-4/2007/10 Council 8 May 2007
ENGLISH ONLY
ECONOMIC COMMISSION FOR EUROPE
COMMITTEE ON ENVIRONMENTAL POLICY
Ad Hoc Preparatory Working Group of Senior Officials “Environment for Europe”
Fourth meeting Geneva, 30 May–1 June 2007 Item 2 (f) of the provisional agenda Provisional agenda for the Sixth Ministerial Conference “Environment for Europe” Partnerships
PPC REPORT TO THE SIXTH MINISTERIAL CONFERENCE “ENVIRONMENT FOR EUROPE”1
Proposed category II document2
Submitted by the Project Preparation Committee
1 The text in this document is submitted as received from the authors. This is a draft document. 2 Background documents (informational and analytical documents of direct relevance to the Conference agenda) submitted through the WGSO. EXECUTIVE SUMMARY
[To be inserted]
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CHAPTER 1: INTRODUCTION
1. The PPC was established in 1993 following decisions taken by Ministers at the Second Ministerial Conference “Environment for Europe” (EfE) in Lucerne, Switzerland. Since then, the PPC has served as a mechanism for dialogue and coordination between IFIs, donors and client countries. It has worked to support the identification and development of environmental investment projects across the region, in a range of different environmental sub-sectors, playing a complementary role to its sister organisation under the EfE, the EAP Task Force. The PPC’s mandate was subsequently renewed at the EfE conferences at Sofia (1995), Arhus (1998) and most recently Kiev (2003).
2. At Kiev the PPC reported that 219 projects had been subject to the PPC mechanism between 1998 and 2003, either (i) through presentation by an IFI, donor or client country at a PPC meeting; (ii) by receiving PPC-facilitated support from a donor and/or IFI; or (iii) through the direct involvement of a PPC Officer. 69 of these projects, at an accumulated investment value of €3,853 million, had been Board approved by IFIs at the time of the Kiev conference. These projects had benefited from financial support equal to €1,895 million in IFI loans and €904 million donor grants.
Mandate
3. At Kiev Ministers agreed to renew the PPC’s mandate but asked it to continue to concentrate its support on the countries of Eastern Europe, Caucasus and Central Asia (EECCA) and the non-accession countries of South-Eastern Europe (SEE), and to phase out its work in Central Europe by 2004. Ministers also asked the PPC to coordinate more closely with the EAP Task Force by holding joint annual meetings and establishing a common Bureau. It was also agreed that participation in both the PPC and the EAP Task Force should be open to a wider range of stakeholders including NGOs and the private sector, and that the EBRD and OECD should continue to provide Secretariats for the PPC and EAP Task Force, respectively.
Box 1: Key outcomes of the Kiev conference
At the Kiev conference, Ministers agreed a number of goals for the future of the EfE process: * To promote the achievement of policy objectives through regional and sub-regional cooperation on policy responses based on environmental monitoring and assessments, integration with sectoral policies, and governance, including the involvement of civil society, business and industry, and other major groups; * To strengthen the implementation of environmental instruments to which countries are party, including regional conventions and protocols, and to encourage efforts to improve their efficiency, effectiveness and coherence; * To improve cooperation between the regional programmes of United Nations bodies and organizations and other international organizations and institutions; * To mobilize financial resources from all sources, inter alia, from governments, IFIs, donors and the private sector, to support the implementation of regional environmental instruments and sub- regional initiatives including capacity building; * To support interregional cooperation and links with the global environmental governance structure, where this adds value; * To contribute to UNECE regional implementation of global sustainable development process; * To improve and strengthen monitoring and assessment in the region.
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Organisation
4. Since Kiev, the PPC has operated as a network open to donor governments, IFIs, UNECE countries, international environmental programmes, the private sector, NGOs and other stakeholders. As agreed at Kiev, the PPC and EAP Task Force have received overall guidance from a common Bureau consisting of representatives of donor and EECCA countries, and co- chaired by the EC. The UK has continued to provide the PPC Chair, and EBRD has continued to host the PPC Secretariat, with financial support from the EC, Finland, Switzerland and the UK. PPC Officers were recruited with financial support from the EC, Finland, Italy, Luxembourg, the Netherlands, Sweden and the USA. The organisational arrangements of the PPC and its stakeholders are illustrated in Figure 1.
Figure 1: PPC organisational arrangements since the Kiev conference
PPC stakeholders PPC staff and management
Donor governments Bureau IFIs
UNECE countries PPC Chair International environmental programmes
Private sector
PPC Officers PPC Secretariat NGOs
Other stakeholders
5. Since Kiev the PPC has aimed to strengthen its presence in its countries of operation by creating PPC Officer positions based in EECCA and SEE countries as well as in IFI headquarters. Since 2003 PPC Officers have been located in Belgrade, St Petersburg, Tbilisi and Zagreb. The PPC has also explored alternative staffing arrangements including the recruitment of a PPC Consultant and locally hired PPC Officers.
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Figure 2: Summary of PPC mechanisms
Mechanisms and the PPC objectives Mechanisms and the project cycle
Leveraging international financing PPC Issue meetings (M6) Mechanism 1. PPC project financing Information meetings Sector hub (M7) Mechanism 2. PPC project financing scoping workshops Monitoring & Project PPC project financing Mechanism 3. Support for IFI managed Evaluation concept workshops project preparation (M2)
Project Pre-feasibility Supporting project preparation implementation PPC project Mechanism 4. Municipal management financing meetings capacity building workshops Project Inclusion on an (M1) Mechanism 5. Development of local preparation IFI pipeline consultancy capacity Support for IFI Development of managed Municipal local consultancy project management Facilitating an enabling environment capacity (M5) preparation capacity (M3) building Mechanism 6. PPC issue meetings workshops (M4) Mechanism 7. Information hub
PPC objectives and targets since Kiev
6. Following the renewal of the PPC’s mandate at Kiev, a new PPC strategy for the period 2004-07 was developed in order to operationalise the commitments made at Kiev.
PPC strategy 2004-07
7. The PPC Strategy 2004-07 was guided by three key documents: i) The Declaration by the Environment Ministers of the region of the United Nations Economic Commission for Europe in Kiev, May 2003; ii) The Environment Strategy for Countries of Eastern Europe, Caucasus and Central Asia (Strategic Framework); and iii) The Millennium Development Goals (MDGs), especially the water and sanitation targets encompassed within MDG VII
8. The strategy was developed through a consultative process involving a wide range of PPC stakeholders and was approved at the Joint Meeting of the EAP Task Force and PPC in Tbilisi in October 2004. It was composed of three pillars:
Pillar I: Project identification, preparation and financing • Working with international financial institutions to identify and prepare environmental investment projects; • Mobilising funds to support the preparation and implementation of projects.
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Pillar II: Coordination, matchmaking and networking • Working with stakeholders to enhance coordination and facilitate investment activities; • Providing information on sources of finance and disseminating details of project financing needs.
Pillar III: Sharing good practice and capacity building • Providing good practice materials and ad hoc advice; • Helping to build capacity in project identification, preparation and finance.
A brochure summarising the 2004-07 PPC Strategy was prepared in both English and Russian and was widely disseminated to PPC stakeholders and other interested parties.
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CHAPTER 2: ACHIEVEMENTS SINCE THE KIEV CONFERENCE
9. Since the Kiev conference the PPC has made good progress in implementing the recommendations made by Ministers. It has continued to promote active coordination between its stakeholders to support the financing of environmental investment projects. The PPC’s support for environmental financing has encompassed a broad range of activities covering the preparation of investment projects, technical assistance projects and project preparation facilities to provide technical assistance for project development.
10. The PPC’s support has been delivered through a number of different approaches. Donor- funded PPC Officers, seconded within IFI banking teams, have continued to enhance IFI project pipelines by supporting the identification, preparation and financing of environmental investment projects. The PPC Secretariat, with donor funding, has set up a number of project preparation facilities to provide technical assistance to enable project development to proceed more quickly. Furthermore, PPC networking events, including the annual Joint Meetings held with the EAP Task Force, have presented opportunities for donor funds to be matched with priority IFI investment projects. The projects supported by the PPC have been in the areas of municipal environmental infrastructure (covering water supply and sanitation, solid waste management, district heating systems and municipal transport), energy efficiency, renewable energy and emissions trading, and nature conservation and biodiversity.
11. In this report the PPC’s achievements are assessed by examining its support for: (i) the identification and preparation of environmental investment projects; (ii) the development of environmental technical assistance projects; and (iii) assistance in setting up donor-funded project preparation facilities. Since Kiev a total of [39] investment projects have been subject to the PPC mechanism, either through the direct involvement of a PPC Officer in the development of the project, by receiving PPC-facilitated support from a donor or IFI, or by being presented to donors at a PPC meeting. [15] of these projects, at a total project cost of [€443 million], have been Board approved by an IFI (see Annex I). These projects have benefited from financial support equivalent to [€260 million] in IFI loans and [€127 million] in donor grants, giving a grant to loan financing ratio of [1:2].
12. In line with the commitments made at the Kiev ministerial conference, the PPC has further shifted the focus of its operations away from the accession countries of Central Europe towards EECCA and the non-accession countries of SEE. [8] of the Board-approved PPC-facilitated projects, at a total investment cost of [€227 million], were in EECCA ([6] of which, at a total project cost of [€58 million], were in Early Transition Countries). A further [4] projects, at a total project cost of [€50 million], were in the non-accession countries of SEE, with the remaining [3] projects, at a total project cost of [€167 million], were in EU accession countries, specifically Bulgaria and Romania.
13. In addition, a further [24] PPC-supported projects have entered into IFI pipelines (specifically EBRD) since Kiev, at a total investment value of [€637 million] (see Annex II). [14] of these projects, at a total investment cost of [€306 million], were in EECCA, with [10] of these, at a total project cost of [€59 million], in Early Transition Countries. A further [7] projects, at a total project cost of [€65 million], were in the non-accession countries of SEE, with the remaining [4] projects, at a total project cost of [€167 million], in the EU accession countries. It is important to emphasise here that this report only covers projects where there has been PPC involvement, and does not include the significant project activity being undertaken by IFIs and donors outside the PPC framework.
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Table 1: Summary of Board Approved IFI environmental projects with PPC involvement
Ministerial Water Waste Energy/ Nature Other (e.g. Total no. Total IFI Donor Per Conference supply/ management heating conservation/ agriculture, of Board investment finance finance region* sanitation biodiversity transport, approved cost (MEUR) (MEUR) industry) projects (MEUR) Sofia 1995 8 12 4 2 7 26 1,200 n/a 80 EECCA 12% EU Access. 77% SEE 11% Arhus 1998 9 12 2 3 14 33 2,300 1,200 245 EECCA 30% EU Access. 46% SEE 24% Kiev 2003 37 8 13 4 11 69 3,853 1,895 904 EECCA 42% EU Access. 32% SEE 26% Belgrade [12] [0] [2] [0] [1] [15] [443] [260] [128] EECCA 2007 [53%] EU Access. [20%] SEE [27%] Total [66] [32] [21] [9] [33] [143] [7,796] [3,355] [1,357] EECCA [34%] EU Access. [44%] SEE [22%]
14. As shown in Table 1, the shift towards the more difficult environments of EECCA and non-accession countries in SEE, especially the lower-income countries of the Caucasus and Central Asia, has meant that a smaller number of PPC-supported projects have been Board- approved since Kiev, as compared to the figures reported in previous EfE ministerial conferences. The sharp drop from the figures reported in Kiev is also due to the drastic reduction in the amount of pre-accession aid made available to EU accession countries, which was especially high during the period before 2003.
Supporting environmental investment projects
15. Since Kiev the PPC has directly supported the identification and preparation of [35] environmental investment projects through the work of PPC Officers. These have been principally in the area of municipal environmental infrastructure, encompassing water and sanitation, solid waste management and municipal transport.
Municipal and environmental infrastructure
16. Municipal and environmental infrastructure has continued to be a major focus of the PPC’s work. The PPC has provided assistance for the development of investment projects in water supply and sanitation, solid waste management and transport.
Water supply and sanitation
17. Access to safe water supplies and sanitation continues to be a major challenge in the PPC’s countries of operation, especially in the lower-income countries of the Caucasus and Central Asia. Access to clean water and sanitation remains a key challenge for many countries in
8 DRAFT the region, with coverage decreasing in many countries, in part due to the deterioration of aging water and sanitation infrastructure. These problems are especially severe in smaller towns and in rural areas. Sustained and significant investment in water infrastructure is necessary for satisfactory progress to be made towards the Millennium Development Goal target of reducing by half the proportion of people without sustainable access to safe drinking water. The PPC has contributed towards tackling these challenges by supporting [12] IFI Board approved water and sanitation projects in [8] countries, at a total project value of [€308 million].
Box 2: Lake Sevan Environmental Project (Armenia)
Armenia has been actively restructuring its water and sanitation sector over the past decade. Most of this effort has been directed towards improving water supply services. Significant developments in this area have been achieved, and attention is now being turned towards the wastewater sector. Most of the existing wastewater treatment infrastructure is significantly deteriorated, and the investment needs are great. Only a small proportion of wastewater is collected through centralised systems, and only a fraction of the collected wastewater is treated. As a result, large amounts of sewage are systematically discharged into open water bodies with no or only partial treatment.
The Lake Sevan Environmental Project was one of the first attempts to address the acute wastewater treatment problems. Lake Sevan is Armenia's most primary water resource and an important tourist and recreational attraction. A relatively large number of settlements are located around the lake. In the past, industrial and household wastewater from these settlements was treated in small wastewater treatment plants before being discharged into rivers flowing into Lake Sevan. Over the past few decades most of this infrastructure has significantly deteriorated and a number of new wastewater treatment plants remain unfinished. Consequently, the lake suffers from significant water pollution that damages its ecological balance and natural attractiveness.
Through the active cooperation of the PPC, EBRD, the Armenian State Committee for Water Systems, the Armenian Water and Sewerage Company and other national bodies, an action plan to address these problems was developed. A number of wastewater treatment plants in need of urgent rehabilitation were identified. Since all these plants were of relatively small size, additional work has been carried out to bundle them into a single project. Detailed project preparation work has followed including a feasibility assessment and affordability analysis. The financing package developed for the project was tailored to reflect the concessionality requirement and affordability constraints. As result, a significant capital investment grant contribution (€5 million) was secured from the EC. The project agreement was signed with the Government of Armenia in April 2007, and implementation has already begun.
18. Key challenges in the water and sanitation sector, especially in lower-income countries, include the identification of sufficient grant co-financing for capital expenditure to enable the investment to go ahead while maintaining the affordability of the water supply to the population. This is a particular challenge in lower-income countries, and in smaller towns and rural areas where smaller investments are needed and where the ability to raise revenues through tariffs is limited.
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Box 3: Khujand Water Supply Improvement Project
The PPC helped to facilitate donor support for a $5 million project to improve the water-supply infrastructure and distribution network in Khujand, Tajikistan’s second-largest city. This project, which included an EBRD loan of $1.2 million, was EBRD’s first municipal loan in Tajikistan, and also the first under the EBRD’s Early Transition Country Initiative, created to tackle poverty in the low-income countries of the Caucasus and Central Asia. The project aims to improve Khujand’s drinking water by installing new pumps and other equipment that should reduce water leakages and generally make the water supply more reliable.
Key elements of the project were supported by a grant from the Swiss Government for capital investments and the provision of a “stakeholder-participation programme” to encourage greater public participation and ensure that poverty and subsistence issues are reflected in tariff reforms. The Government of Norway also funded a performance improvement programme for the Khujand Water Company.
Transport
19. The PPC has also supported a small number of municipal transport projects. Improvements in municipal transport can result in significant environmental benefits as well as reducing congestion and improving energy efficiency. Grant assistance from the ERBD’s Early Transition Countries (ETC) Fund and the Netherlands was critical for enabling a PPC-supported municipal transport project in Tbilisi, Georgia, to go ahead (see Box 4).
Box 4: Improving municipal public transport in Tbilisi, Georgia
The PPC supported a €11.9 million project to enable the Tbilisi Bus Company to restore basic municipal bus services in the Georgian capital and give the residents of Tbilisi access to affordable transport. Georgia’s transport networks were disrupted by the conflicts and under-investment that followed independence in 1991. The Tbilisi Bus Company had 1,200 buses at that time for the city’s 1.4 million people. By 2004 the fleet was down to 80 buses, with only half working on an average day.
The project enabled the city authorities to buy 182 second-hand buses, costing €15,000 each, one-tenth of their value when new. The saving enabled the company to offer good services with affordable fares despite low incomes in Tbilisi. The company was able to expand the number of routes from 42 to 80, allowing buses to carry 18 per cent of Tbilisi’s passengers by 2007 against just 10 per cent in 2005. As the official bus service improves, fewer informal minibuses will be needed, thereby improving safety, traffic conditions and service quality.
Environmental technical assistance projects
Biodiversity and environmental mainstreaming
20. In addition to investment projects, the PPC has also helped to develop a number of stand- alone environmental technical assistance (TA) projects, with donor support. Some of these were linked to EBRD investment projects in sectors such as power and energy and natural resources, as ‘add on’ environmental management components. For example, Canadian support has been used to implement an Environmental Management System (EMS) at the electricity utility Elektrostopanstvo na Makedonija in the Former Yugoslav Republic of Macedonia, complementing an ongoing EBRD investment project. A similar TA project has been carried out
10 DRAFT with Elektro Privreda Srbije in Serbia, this time with support from the European Agency for Reconstruction.
21. The PPC has also facilitated stand-alone TA projects in the area of biodiversity and nature conservation. In the Kyrgyz Republic a TA project has been delivered, with support from the UK and IFC, to promote private sector involvement in biodiversity conservation activities and improve local livelihoods. This project is linked to an EBRD investment project in the adjacent Kumtor Gold Mine. The PPC also worked with EBRD and the EC on a pilot project on Pro- Biodiversity Business in the Steppe Zone of the Eurasia region, which was agreed in 2006. This project was designed to encourage micro and small businesses to support biodiversity. The project received support from the Tacis regional programme biodiversity component, which focuses on the steppe ecosystems covering parts of Kazakhstan, Moldova, Russian Federation and Ukraine. The project aimed to establish an operating structure and procedures for identifying countries, regions and companies that show potential for and interest in creating pro-biodiversity businesses. The next stage was the provision of technical assistance to selected micro, small and medium- sized enterprises that use biodiversity resources and are willing to work towards creating pro- biodiversity businesses. Technical assistance was also used to develop a biodiversity monitoring system with key indicators and other benchmarks to evaluate the positive impact of investments on specific habitats and/or species.
Box 5: PPC support for launching biodiversity-related initiatives within EBRD
Preserving and protecting biodiversity is an important aspect of good environmental management. All EBRD-financed projects are expected to include measures to safeguard and, where possible, enhance natural habitats and the biodiversity they support. The EBRD is also committed to supporting investments that specifically promote biodiversity.
The EBRD has worked with the European Centre for Nature Conservation (ECNC) for a number of years to consider biodiversity concerns in the Bank’s countries of operations. The EBRD and other organisations, including the ECNC, the European Investment Bank and Rabobank, participate in the work of the task force on banking, business and biodiversity within the framework of the Pan-European Biological and Landscape Diversity Strategy. Possible biodiversity financing mechanisms and the establishment of a European Biodiversity Finance Facility are being examined.
The EBRD was the prime adviser to a project funded by the Dutch DOEN Foundation to develop a pipeline of projects that would have a positive impact on biodiversity in Poland and Hungary. The project was completed in 2006, identifying over 5,000 micro, small and medium-sized businesses where investment would help sustainable management of biodiversity as well as improving the commercial performance of firms. If demand exists the Bank could consider setting up a pilot biodiversity financing facility in Poland. Discussions could also be held with Polish banks and the Polish Government, who has expressed interest. A request for co-financing of the prospective pilot biodiversity financing facility has been sent to the Polish Government for consideration.
In 2006 the EBRD provided input to the EC-funded project to set up Biodiversity Technical Assistance Units in Poland, Hungary and Bulgaria, preparing the ground for prospective biodiversity financing facilities. The EBRD is now represented on the steering committee of this project.
Project preparation facilities
22. In addition to providing direct support for project development, the PPC has also indirectly supported a large number of environmental investment projects by helping to set up donor-funded
11 DRAFT project preparation facilities to provide technical assistance for the development of specific projects or groups of projects. These have been designed specifically to deal with particular difficulties related to the identification, preparation and implementation of environmental investment projects. An additional aim of these facilities was to support the development of local consultancy capacity, where possible.
Municipal and Environmental Infrastructure
23. The PPC facilitated two project preparation facilities that provided rapid technical support to assist the development of a range of municipal and environmental infrastructure projects. UK support totalling [€133,000] was used to set up a District Heating Support Facility, which was used to support feasibility studies and specialised advisory inputs on district heating investment projects in Poland, Romania, the Russian Federation and Uzbekistan. An Austrian contribution of [€600,000] made possible a Municipal and Environmental Infrastructure Technical Cooperation Facility for Russia and South Eastern Europe, which was used to support municipal infrastructure projects in the Former Yugoslav Republic of Macedonia, Romania and the Russian Federation.
Energy efficiency, renewable energy and emissions trading
24. Energy efficiency, renewable energy and emissions trading have been a major focus of the PPC’s work since Kiev. This reflects the growing international interest in energy efficiency, driven by concerns over climate change and energy security in the European neighbourhood region. The main way in which the PPC has supported investments in these areas has been through the establishment of donor-funded technical assistance facilities and credit lines to support EBRD energy efficiency investments, and to enable such investments to benefit from carbon financing opportunities.
25. The Kyoto Protocol sets binding targets on industrialized countries for the reduction of greenhouse gas emissions. Under the Kyoto Protocol, specific mechanisms have been created to trade project–based carbon credits. The carbon credit idea is simple: a project investment leads to greenhouse gas emission reductions compared to a baseline, which emission reduction performance, monitored and certified, can be sold to countries and companies with a shortage of rights to emit greenhouse gases. Sponsors of energy-saving projects are able to sell the project’s certified emission reductions (CER), commonly referred to as carbon credits. One carbon credit is equivalent to one tonne of CO2 emission reductions.
26. There is a large potential market for project based credits originating from the countries covered by the PPC. Given that most EU-15 states, Canada and Japan will need to buy carbon credits to meet their Kyoto targets, this market is expected to grow. The eligible countries have a high potential for generating carbon credits because:
• Several of these countries have a surplus of carbon credits. This is because the Kyoto Protocol reference year for the emissions reduction targets is 1990 and since then emissions have dropped sharply in countries such as the Russian Federation and Ukraine, as a result of the substantial contraction of their GDP after 1990. These countries will therefore be likely sellers of carbon credits. • High carbon and energy intensities in countries in transition also create significant opportunities for low-cost emissions reductions. This is because the cost of achieving an emission reduction in such countries is low relative to Western countries whose economies
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are much more energy efficient and generally less carbon intensive, and are thus characterised by a higher relative carbon abatement cost.
27. The emerging carbon credit market fits well with the EBRD’s environmental mandate and transition impact. The potential benefits of this market for the EBRD are:
• Using the additional revenue from selling carbon credits to finance more and/or more risky “climate-friendly” projects, such as energy efficiency, renewable energy, fuel switching, landfill and biogas (waste water), etc.; • Assisting with the development in its countries of operations of such market based mechanisms for environmental protection and transition.
Clean Development Mechanism facilities
28. One of the financing mechanisms established under the Kyoto Protocol is the Clean Development Mechanism (CDM). This allows industrialised countries to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.
29. The PPC, with financial support from the Dutch Government and the Early Transition Countries Multi-Donor Fund, has set up technical assistance facilities to enable energy saving projects to benefit from CDM financing. The CDM in Caucasus and Central Asia facility was made possible by a €90,000 contribution from the Netherlands, and a CDM Project Support Facility for Early Transition Countries was subsequently set up with a €350,000 contribution from the ETC Multi-Donor Fund. These facilities have been used to reduce barriers to the development and implementation of CDM projects and develop carbon financing components in EBRD investment projects in the areas of power and energy, and industry (see Table 2).
Table 2: EBRD investment projects supported by PPC-facilitated CDM facilities in the Caucasus and Central Asia
Project Location Total Project Project summary project status cost (€ mil.) Bazenc Mini-Hydro Armenia 1.18 Board This mini-hydro project in Armenia was Power Plant – approved identified during a survey for CDM Project under projects. The Netherlands provided support EBRD’s Direct for the CDM baseline and validation Lending Facility studies, and the project is expected to have a strong demonstration effect for further mini-hydro projects. The loan is being provided through the EBRD’s Direct Lending Facility, which is designed to provide small loans. Armenia Armenia 11.53 Board Loan to financial intermediary which will Renewable Energy approved invest in renewable energy projects, Programme primarily mini-hydros. A PPC Officer contributed to a TA component that will enable the monetisation of carbon emissions in individual projects.
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Project Location Total Project Project summary project status cost (€ mil.) Rehabilitation of Azerbaijan USD Board Investment into rehabilitation of the major AzDRES Power 127.7 approved generation station and selected transmission Plant mil. facilities with the aim of improving power system reliability and efficiency. PPC staff assisted in the development of the energy efficiency and fuel-switch project as a CDM project. Georgian Gas Georgia 69.16 Under An energy efficiency and environmental Transmission development safety project aimed at rehabilitating the Pipeline North-South main gas pipeline of the Rehabilitation Georgian transmission system through a carbon credit financing structure. Interglass Energy Kyrgyz 5.5 Signed The EBRD is currently assisting the Efficiency Project Republic sponsor Interglass in developing its energy efficiency project as a CDM project supported by the CDM Project Support Facility for the Early Transition Countries.
Energy efficiency and renewable energy credit lines
30. The PPC has worked with the EBRD to establish a credit line facility of €105 million for six Bulgarian financial intermediaries (FIs) to provide loans to sub-borrowers for industrial energy efficiency and renewable energy projects. This credit line has been supplemented with a €20 million grant from the Kozloduy International Decommissioning Support Fund. Over 31 projects are currently being financed under the facility, of which eight are fully operational, and there is a strong pipeline of over 100 projects. The PPC has also supported the development of a similar credit line in Slovakia, which is currently under development.
Multilateral Carbon Credit Fund
31. The PPC played a key role in helping to set up the Multilateral Carbon Credit Fund (MCCF). The MCCF has been established by the EBRD and the European Investment Bank (EIB) as a key instrument in their strategy for combating climate change. It is designed to develop the carbon market in countries in transition to market economies by helping EBRD and EIB shareholders and other parties to meet their mandatory or voluntary greenhouse gas emission reduction targets. The Fund sources and purchases carbon credits from projects financed by the EBRD and/or EIB in countries in transition eligible for EBRD operations. Typical projects generating carbon credits are switching fuel from coal/mazut to natural gas, renewable energy, energy efficiency, waste to energy, avoidance of gas flaring/venting and forestry. The MCCF also facilitates Green Investment Schemes in which the proceeds of state-to-state trading of carbon credits are used to finance climate friendly projects in the selling country. It also aims to stimulate and complement the participation of the private sector in the carbon market.
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Box 6: PPC support for the Sustainable Energy Initiative
The PPC has supported the establishment of the EBRD’s Sustainable Energy Initiative (SEI). The SEI was launched in May 2006 and is intended to help the EBRD to:
* Scale up its sustainable energy investments by more than doubling those in energy efficiency and cleaner energy to €1.5 billion between 2006 and 2008; * Strengthen its capacity to deliver, through internal organisational changes that mainstream energy efficiency objectives throughout the EBRD with team by team targets and enhanced specialised support from a cross-cutting energy efficiency and climate change team; * Work with other multilateral development banks (MDBs), international organisations and local bodies to enhance the impact of its policy dialogue and share best practice; and * Establish a new partnership with donors to access the grant funds required to scale up structured financing packages of commercial finance combined with grant funds for capacity building and incentives.
The SEI will focus initially on scaling up tried and tested approaches in five key sectors: industrial energy efficiency, sustainable energy financing facilities through financial intermediaries, cleaner energy supply, renewable energy, and municipal infrastructure. The EBRD will also work with its two carbon funds to promote the development of a liquid carbon market in its region.
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CHAPTER 3: PPC ACTIVITIES SINCE KIEV
32. Since 2004 the work of the PPC has been organised under three pillars, as set out in the 2004-07 Strategy: i) Project identification, preparation and financing; ii) Coordination, matchmaking and networking; and iii) Sharing good practice and capacity building.
Project identification, preparation and financing
PPC Officers working inside IFI teams
33. The PPC has facilitated the placement of a number of donor-funded PPC Officers inside IFI banking teams, where they have contributed to the identification and development of a wide range of environmental projects in municipal and environmental infrastructure, energy efficiency, renewable energy and emissions trading and biodiversity and environmental mainstreaming. The funding for these positions has been provided by Belgium (Walloon region), the EC, Finland, Italy, Luxembourg, the Netherlands, Sweden, and the USA (see table 3). Since Kiev all PPC Officers have been located inside the EBRD, where they have played catalytic roles within the Municipal and Environmental Infrastructure Team, the Energy Efficiency and Climate Change Team and the Environment Department. The UK, EC, Finland and Switzerland have also provided funding for the PPC Secretariat during this period.
Table 3: Donor support for PPC staffing positions during 2003-07
Donor Contribution Sector supported Belgium (Walloon region) [to be inserted] [to be inserted] EC “ “ Finland “ “ Italy “ “ Luxembourg “ “ Netherlands “ “ Sweden “ “ Switzerland “ “ UK “ “ USA “ “
34. The PPC has also explored alternative arrangements for PPC Officers in order to respond to the needs of different stakeholders. For example, during 2005-07 the EC funded a PPC Consultant to work with the EBRD on water and sanitation projects in the Early Transition Countries (see Box 7). This was an innovative model which may provide some useful lessons on how the PPC could operate in the future. More recently, the PPC has also attempted to recruit locally-hired PPC Officers, in order to take advantage of local knowledge and expertise, including knowledge of local languages.
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Box 7: PPC Consultant in Early Transition Countries
During 2005-06 the EC supported the PPC by providing funding for a one-year PPC Consultant position working in the ETC, with a particular focus on Armenia, the Kyrgyz Republic and Moldova. In contrast with traditional PPC Officer positions, the consultant focused on project development in one particular field, in this case water supply and sanitation. This arrangement helped to ensure greater specialisation and closer networking relationships with relevant stakeholders, which in turn improved the speed and efficiency of project preparation. The PPC Consultant worked in close cooperation with the EBRD’s Municipal and Environmental Infrastructure Team, national water authorities, EU Water Investment Support Facility team, feasibility study teams, local water operators and municipalities. Specific tasks included: - Identification of project ideas in ETC countries through extensive contacts, meetings, discussions with national water authorities, municipalities, water companies, and other relevant stakeholders; - Prioritisation and selection of projects based on criteria such as local impact, fit with national priorities, fundability, financial sustainability, and others; - Development of selected projects and preparation of project documents for rapid project concept approval; - Development of project financing packages, including identification of potential grant sources for capital investment and technical assistance; - Assistance to the EBRD in preparing terms of reference for feasibility studies as well as assistance with mobilising feasibility study teams; - Assistance with negotiations of final project financing package and terms with national authorities;
Through this assignment a number of project ideas were identified and developed, including the Lake Sevan Environmental Project (Armenia), which was fully identified, developed, prepared, negotiated, and signed within the timeframe of the PPC consultancy.
35. Through its involvement in the development of environmental projects the PPC has learned a number of important lessons on the specific challenges to the preparation of environmental infrastructure projects in EECCA and SEE countries. These vary across the different sub-regions in which the PPC has been active, as shown in Box 8.
Box 8: Challenges to the preparation of environmental infrastructure projects in different parts of EECCA and SEE
North-West Russia Project implementation is often lengthy due to unstable financial and regulatory frameworks, complex contract structures and a weak legal framework. Legislation and regulations that are unclear, transient or conflicting, as well as changes in the responsibilities of government and municipal organisations can slow down project progress. To avoid unrealistic expectations it is essential to spend adequate time and resources at the preparatory stage, to make sure that the project is both financially and technically viable.
Early Transition Countries The main challenge in the ETC is to provide substantial infrastructure investment financing for urgently needed improvements in the quality of services, and in the operational and financial management of utilities, within tight affordability constraints. As a result, almost all municipal infrastructure projects in the ETC require significant grant funded components. The PPC has devoted a substantial amount of time and effort to identifying sources of grant financing for projects in the ETC. Such concessionality helps to address affordability constraints and limited local financial revenues. On the other hand, excessive use of grant financing could erode the incentives for financially sustainable projects that achieve cost-recovery and are managed by local operators. Therefore the optimal combination of loan and grant financing must be identified for each project. While recognising affordability constraints and the need to address the needs of the poor, it is important to acknowledge that the only long-term sustainable model for service delivery is full cost-recovery. Therefore, all project implementation plans should be based on adjusting tariffs to allow
17 DRAFT full-cost recovery, with the tariff adjustment strategy fitted to expected changes in income levels and other income-related assistance and subsidy programmes.
Western Balkans Project implementation can be lengthy due to a lack of experience in project management and procurement and scarce engineering and management skills. Conflicts of interest between project partners (e.g. financiers, investors, donors, public utilities, local governments, regional administration and national ministries) can be avoided by clearly setting out roles and tasks in project documents. Institutional weaknesses may also be a problem in some SEE countries that have only recently embarked on local government reforms. Affordability of services is a key issue and tariff and subsidy policies must ensure that services are sustainable and operated on a cost-recovery basis and that they are provided to all, particularly the poor.
Coordination, matchmaking and networking
36. The PPC has continued to work with its stakeholders to enhance the coordination of environmental investment activities, provide information on sources of finance and disseminate details of project financing needs.
Working with donors to identify funds for technical assistance and co-financing of environmental projects
37. The PPC has worked with donor members of the PPC network to facilitate both the co- financing of IFI investments and the provision of donor funds for project related TA. This has been achieved through the work of PPC Officers to identify financing needs, and through the networking and information sharing activities led by the PPC Secretariat. The annual Joint Meetings of the EAP Task Force and the PPC, held in Paris (2003), Tbilisi (2004), Yerevan (2005), Berlin (2006) and Brussels (2007) have served as important opportunities for bringing together donor and IFI representatives, and have usually included sessions on mobilising finance, in which PPC-facilitated project ideas have been presented to donors.
Box 9: Trends in donor support for environmental investments
[To be inserted when the findings of the 2007 PPC donor survey have been received]
38. As detailed in Chapter 2, the PPC helped to mobilise [€XXX] million of donor support for project-related technical assistance and [€XXX] million of grant co-financing between 2003 and 2007. Box 10 gives an example of a PPC-facilitated project that benefited from donor support.
Box 10: Archangelsk Municipal Water Services Project (Russia)
The PPC supported the development of this €25.3 million project in Northern Russia, which aims to reduce water losses and minimise the discharge of untreated sewage into local rivers and the Barents Sea Basin, lower operation and maintenance costs and improve the operational and financial performance of the municipal water and waste-water services in Archangelsk. This is a priority project of the Northern Dimension Environmental Partnership (NDEP), which provided a co-financing grant of €8.2 million. In addition, Finland, Luxembourg, Sweden, the UK, the EU and the NDEP provided funding for technical assistance activities including the Technical Feasibility Study, Creditworthiness Enhancement Programme, Environmental Action Plan, PIU Training and Support, International Project Engineer and Corporate Development Programme.
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Working with the EAP Task Force
39. Enhanced cooperation with the EAP Task Force has been an important objective of the PPC, following the decision by Ministers at Kiev that the two organisations should work more closely together, including through holding joint annual meetings and reporting to a common Bureau. Following Kiev, the EAP Task Force and the PPC assumed joint responsibility for Objective 5 of the EECCA strategy (environmental financing), with EAP Task Force as a facilitator and the PPC as a cooperating institution. The areas identified for cooperation were improving the policy and institutional environment for environmental financing, supporting the more strategic use of EECCA financial resources, increasing increase capacity for project identification, preparation and implementation, and strengthening dialogue and create more realistic expectations between EECCA countries, donors and IFIs.
40. At the 2nd Joint Meeting of the EAP Task Force and PPC (Tbilisi, October 2004) a programme of cooperation was agreed. The objectives of this programme were to ensure that lessons learned at the policy and institutional level through the work of the EAP Task Force were reflected in the project-level work of the PPC and vice-versa, to ensure effective dissemination of lessons learned by the EAP Task Force and PPC amongst stakeholders in the “Environment for Europe” process, and to prevent overlaps in the work programmes of the two organisations. Since then, the PPC and EAP Task Force have worked together closely to implement this programme of cooperation through annual Joint Meetings (Paris 2003, Tbilisi 2004, Yerevan 2005, Berlin 2006, and Brussels 2007) and regular meetings of the joint Bureau, policy dialogue on environmental financing issues, operational coordination such as the coordinated planning of workshops and training events, and coordinated information sharing and communication activities including joint newsletters and the coordination of website information.
Cooperation with other regional initiatives
41. The PPC has also worked closely with a number of other regional initiatives active in the field of environmental financing in EECCA and SEE.
Danube and Black Sea Task Force (DABLAS)
42. The EC’s Danube and Black Sea Task Force (DABLAS) was established in 2001 with the aim of providing a platform for co-operation for the protection of water and water-related ecosystems in the Danube and Black Sea Region. The PPC has supported the DABLAS initiative since its inception. More specifically, since Kiev the PPC has collaborated with the Task Force through the provision of advice on their work programmes, participation in annual DABLAS meetings and the meetings of the DABLAS Implementation Working Group. This has included providing information on PPC projects that feature in the DABLAS pipeline. The Italian-funded PPC Officer covering the Western Balkans was specifically tasked with coordination with the DABLAS initiative. In addition the PPC assisted with the recruitment of the EC-funded Black Sea Project Broker as part of the DABLAS initiative, and a former PPC Officer was selected for the position.
EU Water Initiative
43. The PPC has supported the EECCA component of the EU Water Initiative, which was launched in 2002 to help meet the challenges of the water-related MDGs. Specifically, the PPC
19 DRAFT has collaborated with the EUWI’s Finance Working Group (FWG) through participation in their meetings, making presentations on PPC activities and related financing activities, and information sharing. The EC-funded PPC Consultant and Swedish-funded PPC Officer based in Tbilisi were both tasked with building on EUWI EECCA priority projects, where possible, as part of their work on municipal environmental infrastructure projects in the ETC. The Lake Sevan Environmental Project in Armenia is an example of PPC cooperation with the EUWI. The feasibility study for the project was financed and implemented by the EC Water Investment Support Facility (WISF) mechanism, and the project was subsequently co-financed with a €5 million grant from the EC Water Co-Financing Facility.
Northern Dimension Environment Partnership (NDEP)
44. The NDEP was established in 2001 as an innovative international response to pressing environmental problems in North-West Russia, combining the expertise and resources of bilateral donors, the European Commission, Russian Federation, EBRD, EIB, NIB and the World Bank in designing and implementing a pipeline of projects in water, wastewater, solid waste, energy efficiency and nuclear waste management. Since Kiev the PPC has worked with the NDEP to mobilise funds to finance priority projects in the NDEP pipeline. Finland has provided funding for two PPC Officers, based in the EBRD Resident Officer in St. Petersburg, who have supported a number of projects that have benefited from NDEP co-financing (see Table 4).
Table 4: Board-approved NDEP projects supported by the PPC (2003-2007)
Name of project Beneficiary IFI Project IFI loan NDEP cost (€ million) Grant (€ (€ million) million) Arkhangelsk Municipal Water Services Russian EBRD 25.29 10.0 8.2 Project Federation Komi Municipal Services Russian EBRD 21.14 10.0 3.72 Improvement Project Federation St. Petersburg Northern Wastewater Russian EBRD 108.0 42.85 6.35 Treatment Plant Incinerator Federation EIB (EBRD) NIB 20.0 (EIB) 12.98 (NIB)
Early Transition Countries Initiative
45. The ETC Initiative was established in 2004 by the EBRD in partnership with a number of donors with the objective of enabling the EBRD to increase its impact, reach and volume of transactions in the seven poorest EECCA countries (Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan). In 2006 Mongolia became the eighth country to join the ETCI. The ETCI is based on three pillars: (i) the EBRD’s readiness to take on more risk in these countries, while respecting sound banking principles; (ii) the EBRD’s commitment to increase its dedicated resources (staff and budget) at headquarters and in Resident Offices; and (iii) more efficient and deeper support from the donor community in terms of joint technical assistance and grant co-financing of EBRD-led programmes and projects. 46. The PPC has supported the ETCI through the appointment of an EC-funded PPC Consultant and a Swedish-funded PPC Officer to work on the identification and preparation of municipal environmental infrastructure projects in the ETC. The PPC also delivered a project
20 DRAFT financing workshop, with funding from the ETC Multi-Donor Fund, in Armenia in summer 2007 [outcomes of the planned workshop to be inserted after the workshop has been held]. The PPC also support a number of projects that benefited from technical assistance from the ETC Fund, as shown in Table 5. Table 5: Projects supported by the PPC with ETC Multi-Donor Fund support (2003-2007)
Name of project Location Project cost IFI loan ETC TA (€ million) (€ million) (€ million) Lake Sevan Environmental Project Armenia 14.6 7.5 (EBRD) 1.2 City of Tbilisi Public Transport Project Georgia 6.38 3.1 (EBRD) 0.68 Kutaisi Water Supply Improvement Project Georgia 11.92 3.0 (EBRD) 1.01 Poti Water Supply Project Georgia 10.45 2.5 (EBRD) 0.96
Regional Environment Centers
47. The PPC has collaborated with the Regional Environmental Centers (RECs) in the region, including through active participation in “Environment for Europe” fora. For example, the PPC has supported the REC for Central and Eastern Europe in developing the Priority Environmental Investment Programme (PEIP) for South-Eastern Europe.
Box 11: PPC collaboration with the EC’s investment support facilities
[To be inserted once the findings of the 2007 PPC donor survey have been received]
PPC networking tools
48. The PPC has used a number of networking tools to disseminate information, and promote coordination and matchmaking.
• PPC website: a new PPC website was launched in 2004 to provide an information portal for PPC stakeholders (www.ppcenvironment.org). Available in both English and Russian, the website provides a range of resources and information, including a database of grant finance sources, a project database with details of all projects being supported by the PPC and good practice documents, with links to documents on the EAP Task Force website. • PPC newsletters: newsletters are prepared jointly with the EAP Task Force and circulated to members of the PPC and EAP Task Force networks approximately every six months. • Stakeholder meetings: the PPC makes use of the annual Joint Meetings of the EAP Task Force and PPC to present information on PPC activities and project financing needs to donor representatives and other members of the PPC network.
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Sharing good practice and capacity building
Project Financing Workshops
49. One of the major themes of the PPC’s post-Kiev strategy was the intention to support the development of local capacity for project identification and preparation. The lack of such capacity was identified as one of the major obstacles to the financing of environmental improvements in EECCA and SEE countries. The PPC’s own experience showed one of the best ways of ensuring that municipal entities are able to attract co-financing for their priority investment projects is to help build their capacity to develop sound project concepts. In response to this need, the PPC developed and delivered a programme of project financing workshops aimed at building capacity for project identification, preparation and financing skills in EECCA and SEE countries.
50. The development phase of the workshop programme was carried out during 2003-05, with funding from the UK. A competitive tender was carried out and the Danish consultancy COWI A/S was awarded a contract for the development and implementation of the workshop programme. Work completed during this phase included the design of the workshop content and format and the development of the workshop training materials. Extensive consultation was carried out with IFIs and other stakeholders to ensure that the workshops met their needs as much as possible. A pilot workshop was carried out in Moscow in July 2004 and introductory seminars on the project financing workshops were held at the REC-CEE Workshop on Water Sector Investment Projects in Belgrade in November 2004 and at the DABLAS meeting in Karlovac, Croatia in June 2005.
51. The overall purpose of the project financing workshops is to assist municipal project proponents in entering into a constructive dialogue with IFIs, donors and/or commercial banks about their project ideas. The main focus was on municipal, environmentally oriented, financially viable, stand-alone investment projects for which project proponents are seeking co-financing from IFIs, donors and/or commercial banks. The primary target group of the workshops are sub- sovereign and municipal investment project proponents, for example municipal authorities and public utilities. The workshops aim to equip participants with the necessary tools to prepare project concepts on their own, ready for submission to potential co-financiers. The intended goal is to reduce the time needed to initiate and prepare a project concept, and to facilitate and enhance communication between project proponents and financial institutions.
52. The implementation phase of the workshop programme commenced in spring 2006. Workshops were subsequently held in Georgia (July 2006) Volgograd (December 2006), FYR Macedonia (May 2007), Ukraine (May 2007) and Armenia (July 2007). The UK provided funding for the first three workshops in Georgia, Volgograd and FYR Macedonia. The Ukraine workshop was funded by Germany and the Armenia workshop was funded by the ETC Multi-Donor Fund. The workshops provided a number of important lessons about building capacity for project preparation, which will be applied in future PPC capacity-building activities:
• The content of each workshop must be adjusted for different countries and municipalities; • The workshop host institution must be carefully selected; • Workshop participants must be appropriately selected, and screened where necessary; • The workshops must maintain realistic expectations of external financing for the project concepts developed; • The workshops must pay attention to the municipalities’ access to finance, including their fiscal/budgetary positions and the availability of sub-sovereign or sovereign guarantees.
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53. In addition they also generated a number of potentially viable project concepts which were presented to IFIs for consideration for further development, as well as being posted on the PPC website. The main outcomes of each workshop are summarised in Table 6.
Table 6: Outcomes of the PPC Project Financing Workshops
Country Funding Host organisation Participants Project concepts donor developed Georgia (July UK Ministry of Natural Representatives of four • Improvement in 2006) Resources and municipalities (Kutaisi, municipal solid waste Environmental Rustavi, Tblisi and management in Rustavi Protection Zugdidi) City • Municipal waste management in Kutaisi City Volgograd, UK Committee for Representatives of five • Frolovo flood Russia Housing and municipalities (Frolovo, protection (December Commercial Services, Kamyshin, Mikhailovka, • Kamyshin wastewater 2006) Volgograd Oblast Volgograd City and treatment plant (I) Administration Volzhsky) • Kamyshin wastewater planr (II) • Volgograd City water treatment facilities rehabilitation • Reconstruction of water treatment facilities in Krasnooktyabrsky District, Volgograd City • Volzhsky wastewater treatment plant FYR UK Ministry of [to be inserted] [to be inserted] Macedonia Environment and Physical Planning Ukraine Germany Association of [to be inserted] [to be inserted] Municipalities Armenia ETC Ministry of Nature [to be inserted] [to be inserted] Fund Protection
Good practice documents
54. The PPC has also prepared and disseminated a number of good practice documents on a number of themes related to project preparation and the financing of environmental investments. All these documents were made available on the PPC website (www.ppcenvironment.org).
• Good Practice in Project Preparation – Public Water Utilities (April 2005): This document, prepared by a former PPC Officer, provided summary guidance notes on good practice in project preparation for water and wastewater infrastructure investment. In addition to skeleton Terms of Reference for consultants, the document includes key lessons learned from PPC projects. The document was approved by DABLAS Task Force members and
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endorsed by the EBRD, EIB and World Bank. It has been published jointly with the DABLAS Task Force, in English and Russian and has been translated by the DABLAS Secretariat into a number of local languages.
• Public Services Agreement (Water) – Model (January 2005): This model public service agreement suitable for public water utilities was again prepared by a former PPC Officer with funding provided by USAID. It is supported with outline guidance notes for implementation.
• Project concept document preparation manual: A manual entitled “How to promote municipal infrastructure projects in the EECCA and SEE countries” was prepared as part of the pilot PPC Project Financing Workshop. This specially designed stand-alone document provided guidance on how to prepare a project concept document for discussion with potential financiers.
• Introductory Guide to Clean Development Mechanism Projects in the Early Transition Countries (2004): This guide was prepared by the consultancy Ecofys under the guidance of PPC staff. A workshop on the Clean Development Mechanism (CDM) was also held in November 2005 as a side event to the 3rd Joint EAP Task Force/PPC meeting in Yerevan. The CDM was introduced as a financial instrument available to project sponsors who invest in emission reduction projects. Presentations were given by the operation leaders from the EU Tacis funded project that assists these host countries in establishing the procedures and institutions needed to participate in the CDM. A presentation by the EBRD explained how the CDM could help to make emission reduction projects more bankable. As a direct result of the workshop, a number of new project opportunities in the region were identified.
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CHAPTER 4: OPTIONS FOR THE FUTURE OF THE PPC AFTER BELGRADE
55. This chapter sets out some recommendations for how the PPC could operate beyond the Belgrade Ministerial Conference. These are based on the findings of the 2006 PPC Review, which involved broad consultation with donor agencies, IFIs, partner countries and other PPC stakeholders.
The evolving context for environmental investments in EECCA and SEE
56. Since the PPC’s mandate was last renewed, the context in which it operates has evolved considerably. In 2004 the expansion of the EU shifted the focus of international environmental assistance further east and south towards the countries of EECCA and SEE. The climate for environmental investments is less favourable in many of these countries, especially in the Caucasus and Central Asia. Several of these countries are low-income, their populations have limited ability to pay for environmental services, levels of project preparation capacity and expertise are generally lower (especially at the municipal level) and, in some cases, there is limited fiscal space for external borrowing. Most of these countries also lack the strong EU accession incentive, coupled with large amounts of pre-accession aid, which helped Central European countries to raise environmental standards in the 1990s. In order to address the severe environmental challenges in these countries, coordinated donor and IFI action will be needed to ensure adequate financing of environmental improvements.
57. There will continue to be a need for international assistance for environmental improvements in EECCA and SEE, especially in lower-income countries. Domestic expenditure in these areas has not been sufficiently prioritised in national budgets, and some countries are simply too poor to be able to allocate sufficient funding. Private sector involvement is still weak and local capital markets are not well developed. IFIs themselves have limited grants for technical assistance and their ability to lend is constrained by limited fiscal space in some of the heavily- indebted countries in the region. Furthermore, the mandates of some IFIs limit the amount of non- lending support that they can provide. For example, the EBRD’s commitment to sound banking principles prevents it from financing projects that are not commercially viable and from subsidising its clients by providing grants for technical assistance or capital expenditure. Moreover, bilateral aid for environmental improvements is gradually declining. The EC is assuming a more prominent role as the leading provider of environmental assistance in the region, through its new aid instruments such as the Instrument of Pre-Accession (IPA) in SEE and the European Neighbourhood Partnership Instrument (ENPI) in parts of EECCA. Furthermore, in recent years the EC has launched a number of initiatives specifically intended to facilitate IFI investments in environmental improvements. These include a number of investment support facilities designed to provide technical assistance in support of new environmental investment activities and dedicated co-financing facilities.
58. A number of different IFIs operate in the region, with different mandates and operational approaches. The EBRD has made a conscious decision to shift its focus further south and east, gradually exiting from Central Europe and focusing more on the countries of EECCA and SEE, in line with the realities of current needs. EIB is in the process of extending its activities further east into some EECCA countries. The World Bank is complementing its traditional lending activities with new approaches such as carbon financing and is preparing sub-national lending instruments through the joint WB/IFC Municipal Fund. ADB has had a significant presence in Central Asia for some time and is now extending its operations into some Caucasus countries.
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59. Donors and IFIs have now been working together in the region for more than fifteen years and they have evolved a range of formal and informal mechanisms for coordination, information sharing and co-financing that did not exist when the PPC was first created. Consequently, international assistance to the region is being delivered in more coordinated and strategic ways. A number of multi-donor and even multi-IFI initiatives have been set up, some with an explicit environmental focus. These tend to be organised on a thematic or sub-regional basis, such as the NDEP, DABLAS Task Force, ETC Initiative and the Western Balkans Initiative (WBI). The PPC is already working in partnership with some of these initiatives. Furthermore, international consensus on aid effectiveness has progressed significantly in recent years. The Paris Declaration on Aid Effectiveness, agreed in March 2005, recommended that aid should be increasingly aligned with partner countries’ priorities, systems and procedures and that greater attention should be given to strengthening partner countries’ capacity to manage aid. It also stressed the need to eliminate the duplication of efforts and rationalise donor activities to maximise cost-effectiveness.
Implications of the evolving context for the PPC
60. The need for assistance for environmental project preparation and co-financing assistance in EECCA and SEE is likely to continue after 2007, especially in lower-income countries. It will be more difficult to identify and develop good environmental investment projects in these countries, and IFIs will need to invest more time, effort and money in upstream project development. Country partners themselves will need to build their capacity to prioritise their environmental investment needs and develop project proposals that can be taken up by IFIs. A shift in focus towards the lower-income countries of the Caucasus, Central Asia and Western Balkans implies a need for a more development-oriented approach. Donor grants will be required in order to finance projects in countries where cost recovery is more difficult and where there is a need to work on smaller and more difficult projects, especially in rural areas, that might otherwise fall below IFI financing thresholds. This will require more effort to find creative ways of financing projects with greater development impact but which may require significant grant financing. Flexible and pragmatic project preparation support will be required.
Demand for a renewed PPC beyond 2007
61. Looking beyond the Belgrade conference, the PPC could continue to play an important role supporting the preparation of environmental investment projects beyond 2007 by filling gaps in existing donor/IFI support for environmental investments. It could also encourage a more development-oriented approach towards the preparation of environmental investment projects. In particular, the PPC could add most value by focusing its efforts on the poorer countries and regions of EECCA and SEE, for example those countries that are eligible for official development assistance (i.e. the Caucasus and Central Asia) together with parts of Russia Federation and Ukraine. Specifically, a refocused PPC could focus on the following:
• a broad range of programmes, including environmental infrastructure, energy efficiency and biodiversity projects; • targeting countries and sub-regions that are in the greatest need of assistance and which risk ‘falling between the cracks’; • supporting pre-feasibility work to assist with the early stages of project scoping; • ensuring broad ownership and participation by a wide range of IFIs; • reflecting countries’ national environment/finance plans as well as IFI requirements.
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Recommendations for the future activities and organisation of the PPC after the Belgrade Ministerial Conference
[This section is to be completed after the 4th meeting of the Working Group of Senior Officials on 30 May – 1 June, Geneva, when the future of the mechanisms of the EfE process will be discussed]
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ANNEXES
Annex I: IFI Board approved investment projects
[To be inserted]
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Annex II: IFI investment pipeline and technical assistance projects
[To be inserted]
29