Reducing Urban and Industrial Pollution in The

ImpactCDIE Evaluation United States Agency for International Development

REDUCING URBAN AND INDUSTRIAL POLLUTION IN THE CZECH REPUBLIC A USAID project in the Czech Republic confronted air pollution at two levels: nationally, through a state environmental fund, and locally, through direct support to municipalities. The national approach proved to be far more effective. Results in Poland, though, suggest regional funds may be the ideal.

SUMMARY

hen it officially formed in 1993, the Czech Republic inherited an environmental legacy of W some of the worst polluted air in central Europe. Poor air quality resulted from the wide- spread burning of low-grade, highly polluting brown coal, often in outdated and inefficient furnaces.

The new Czech government took action to reduce pollution. It curbed highly polluting industries and large power stations. In 1994 it passed the nation’s first Clean Air Act. Shortly after, USAID launched its Environmental Action Program Support (EAPS) project. It undertook to improve air quality in the two most polluted regions, northern Bohemia and northern Moravia. EAPS, a $1.4 million project that began in 1995, was part of a larger ($17 million) USAID effort to decrease environmental CONTENTS degradation in seven central and eastern European countries. Background...... 2 USAID Environmental EAPS had two goals. The first was to strengthen the environ- Action Program...... 3 mental fund’s institutional capacity by providing a resident adviser. The second was to reduce air pollution through Program Elements...... 4 direct technical assistance to 22 high-polluting small munici- Impacts...... 6 palities. The assistance consisted mainly of helping the munici- Program Performance.....11 palities prepare loan applications to be submitted to the fund. Poland...... 13 If granted, the loans would enable municipalities to upgrade Lessons Learned...... 15 their heating from high-sulfur coal to cleaner heating fuels. PN–ACG–628 August 2001 2 In May 2000, USAID’s Center for Development BACKGROUND Information and Evaluation (CDIE) fielded a four-person team to assess the impact of the The Czech Republic was one of the first former Czech project and a more limited assessment Warsaw Pact states to restructure its economy of a similar effort in Poland. Over the course of and adopt political reforms. It moved quickly a month, through site visits and numerous in- to privatize state-held industries, liberalize the terviews, the team found strong evidence that election process, and delegate responsibility to the Czech environmental fund was significantly municipalities for environmental services. The strengthened. The resident adviser managed Czech Republic, officially formed after the the preparation of nearly a dozen studies breakup of Czechoslovakia in 1993, inherited designed to help the fund move toward major nearly 70 percent of the industrial capacity of policy and operational improvements. Many of the former federation, along with an environ- the resulting recommendations were adopted mental legacy of some of the worst polluted air and implemented—allowing the fund to in central Europe. Poor air quality resulted from increase its annual environmental loan portfo- three factors. First, inefficient and essentially lio by nearly $24 million. The fund was thus unregulated industries customarily burned able to make additional loans that would fur- low-grade, highly polluting brown coal. Sec- ther reduce pollution. ond, municipal and district heating plants were using outdated technology and aging equip- The team found a lesser degree of success with ment. And third, residences and businesses the municipalities component of the project. relied heavily on low-grade coal for heating. EAPS did help municipalities prepare their loan packages—but many indicated that such assis- Air and water pollution remains one of the tance was not essential. That is, most municipal- Czech Republic’s most severe environmental ities would have been able to obtain environ- problems. Improving ambient air quality has mental fund loans without project assistance. proved particularly difficult in some regions. EAPS-assisted municipalities that received fund Parts of northern Bohemia in the Czech Repub- loans—and upgraded their energy utilities— lic, Silesia in Poland, and Saxony in southeast did reduce pollution, but much less so than Germany are still referred to today as the “Black what the environmental fund itself accom- Triangle” because of the air pollution that black- plished by adopting EAPS policy recommenda- ens buildings and corrodes monuments. tions and making more loans nationwide. Air pollution alerts in northern Bohemia and EAPS assistance to municipalities had only lim- northern Moravia were common from 1990 ited success in getting loans approved. That is, through 1996, especially during the winter sea- there was little difference between the overall son. During those months, central Europe loan approval rate (41.3 percent) and the rate at comes under the influence of high-pressure at- which targeted EAPS communities loan applica- mospheric systems, yielding only light winds. tions were approved (40.9 percent). Further, These systems are often accompanied by ther- there was little evidence of replication by other mal inversions in which a layer of cool air forms municipalities beyond EAPS-targeted towns and above warmer ground air, trapping suspended cities. particles and other pollutants. Such inversions can produce choking smog that can last several Team Leader: Steve Gale days. The inversions—and the smog and haze Team Members: Matthew Addison, Michael Gould, Keith Forbes they create—are especially damaging to municipalities situated in low-lying valleys. 3 In 1991 the Czech government drafted air qual- ing from commercial banks for environmental ity standards that were amended in 1994 to be- upgrades. Smaller municipalities whose access come the nation’s first Clean Air Act. Shortly to commercial financing was especially limited thereafter, USAID launched its Environmental were hardest hit. The reluctance of Czech Action Program Support commercial banks to fund (EAPS) project. EAPS aimed to smaller municipalities rest- improve air quality in the ed on a number of standard two most polluted Czech re- financial risk factors (liquid- gions—northern Bohemia ity, profitability, repayment and northern Moravia. The potential, degree of sol- Czech government had al- vency, etc.). In the Czech Re- ready undertaken to im- public, making commercial prove air quality by curbing “Making loans to municipalities was highly polluting industries commercial loans thought to be too high a risk. and large power stations. to municipalities Something else was needed. With these major emitters in was thought to be check, municipally owned too high a risk. The Czech State Environ- district heating facilities, es- Something else was mental Fund was estab- pecially from smaller cities, needed.” lished in 1991 to provide were the largest remaining financial support for envi- source of air pollution. ronmental protection. Al- though available to all USAID ENVIRONMENTAL municipalities, it targeted smaller ones. As late as 1996 there was still considerable uncertainty ACTION PROGRAM on the part of municipalities about how to submit a loan package and secure funding. Most USAID designed the Environmental Action Pro- municipalities saw fund application and review gram to decrease environmental degradation in procedures as complicated and confusing. They seven central and eastern European countries. also pointed to a lack of transparency in fund In the Czech Republic, the $1.4 million EAPS operations. The fund itself was not running as project had two environmental goals. The first smoothly as originally planned. Initially it was ($750,000) was to work with the Czech State overwhelmed with far too many applications. Environmental Fund to facilitate lending, In 1997 alone, 462 loan applications were sub- strengthen operations, and improve fund re- mitted, many of poor quality. source allocations. The second goal ($650,000) was to provide technical assistance and train- Municipal Support: Helping ing to small municipalities. The aim was to help With Studies, Packaging Applications them obtain necessary investment financing from the environmental fund to upgrade their For most municipalities in 1995, there was little heating plants. real understanding of how to package an investment loan application that would survive a Czech State Environmental first-round fund review. EAPS attempted to Fund: Filling a Void demystify the process by assisting municipalities with a range of technical assistance, train- When EAPS began in March 1995, most small ing, and analytical support. EAPS offered two Czech municipalities were unable to get fund- types of municipal assistance—and in many 4 localities both were coordinated. The first type Economic Policies provided a direct grant to the municipality to undertake an independent feasibility study of Economic policy can be an important contribu- the proposed environmental upgrade. The tor to sound environmental management. study provided municipalities with an unbi- Through incentives and penalties, economic ased assessment of the technical, economic, and policy can realign decision-making to more environmental impacts associated with the properly take into full account all the environ- upgrade. It covered options such as converting mental and social costs. Such policy can also coal-burning boilers to natural gas, construct- help facilitate the financing needed to imple- ing gas pipelines for residential and commer- ment environmental improvement projects. cial hookups, and rehabilitating aging and Although EAPS did not direct its efforts toward inefficient district heating plants. Fund officials changing policies, it is useful to examine the viewed the feasibility study as an essential first Czech policy context. The project took full ad- step in loan application review, but its costs vantage of economic tools and conditions in could not be underwritten by the fund. EAPS place—namely, natural gas–pricing policies, filled that need and funded the studies. use of market-based instruments, and the unavailability of commercial municipal loans. The second type of EAPS municipal support helped cities package and submit their loan ap- Pricing plications. This often meant not gathering any new technical information but packaging the In centrally planned economies, input prices voluminous materials, completing the applica- (including energy) are often set artificially low, tion form, and assembling annexes. This one- leading to excessive consumption per unit of on-one support also meant the EAPS coordinator output. In addition to their economic effect, in- would often submit the package and then com- put prices may result in high levels of waste municate directly with fund officials. and pollution. To combat the problems caused by inappropriate energy prices, the Czech gov- PROGRAM ELEMENTS ernment allowed energy prices to rise slowly toward international market levels. Higher Programs to abate and manage environmental prices led to increased energy efficiency. pollution typically use one or more of the Coupled with a transition to a market-based following program elements: 1) economic private enterprise industrial base, it resulted in policy reform, 2) environmental regulations and improved air quality. standards, 3) education and awareness cam- paigns, 4) institution building, and 5) techno- Recognizing the reduced environmental dam- logical change. Although EAPS assistance in the age associated with natural gas relative to coal Czech Republic directly addressed only two of and the need to encourage greater natural gas the five areas (education and institution build- use, the government has continued to subsidize ing), project planners considered all five areas natural gas prices. Gradually this has led to a in developing an environmental strategy. The shift from coal to natural gas. EAPS supported strategy was to be accomplished within the this conversion by municipalities in areas with framework of economic policies that supported the highest levels of air pollution that need help introducing clean technology and appropriate obtaining financing. environmental legislation. 5 Market-Based Instruments subsidy is approximately 40 percent of project cost. During the early years of fund operation The Czech government enforces the Clean Air the subsidy approached 80 percent. Act through a series of fines and closure orders. Enforcement is sure and harsh. Fines are col- Environmental Regulations lected for exceeding emission standards, and a portion of that fee is passed to the environmen- And Standards tal fund. The government also levies a user fee or pollution charge. The Czech Environmental Environmental laws, standards, and regula- Inspectorate sets the charge level. Polluters tions—and the government’s capacity and will- make fee payments to the tax authority, and a ingness to enforce them—are key to protecting portion of that money is channeled to the fund. and improving environmental quality. In the Pollution fines are charged for air, wastewater, Czech Republic, the government had already and solid disposal, and user fees are collected passed the Clean Air Act. It has helped reduce on air, water, and agricultural land conversion. air pollution in industrial plants in larger mu- The fund relies heavily on these instruments nicipalities and electric utility power stations for its revenue. In 1997, fees and fines accounted nationwide. In 1994 the Czech Parliament for 89 percent of its revenue. passed legislation establishing the National Air Quality Program to improve air quality from Lack of Financing Options municipal sources such as district heating plants and residential heating. These combus- A major problem facing smaller communities tion sources were mainly coal based, with little that have decided to carry out projects to im- effective control technology to reduce high lev- prove environmental quality is unavailability els of particulate matter and sulfur dioxide of financing. Many municipalities do not gen- emissions. Legal and regulatory frameworks in erate sufficient funds from their annual budgets support of environmental management were al- to pay directly for such large capital projects. ready in place and being enforced. Therefore, Longer term financing is needed. The munici- this kind of EAPS project support was not pal bond market is nonexistent, and commer- needed. The government’s interest in accession cial banks are only now making loans to to the European Union and the associated re- municipalities, but at interest rates that are quirement of maintaining sound pollution somewhat high (about 11 percent) and for terms abatement and management further reinforced that are short (five years or less). an effective environmental regulatory framework. In response, the Czech government in 1991 established the Czech State Fund for the Environ- Education and Awareness ment. It was initially capitalized by a transfer from the Czech National Property Fund ($150 Training can be an effective means to broaden million, at current exchange rates) and a $10 the impact of technical assistance. Likewise, million U.S. government grant. Since then, ad- public information and outreach programs can ditional funds have been obtained through fines involve more people in community-related and levies and additional transfers from the activities, thus strengthening local government property fund. The environmental fund pro- capability. EAPS carried out only limited train- vides grants and subsidized loans to munici- ing. A pilot training course was held in Prague. palities such that when the grace periods and A session was also held in northern Bohemia interest rates are taken into account, the overall and one in northern Moravia. Both were aimed 6 at informing municipal officials about apply- package and then following up with the ing for environmental fund assistance. The re- environmental fund to obtain financing. The gional sessions were also used to present two project also provided limited environmental computer models: a financing model munici- strategy assistance and some stand-alone fea- palities can use to estimate their borrowing lim- sibility studies. its, and an economic model for gas pipeline valuation. Technological Change

Institution Building New technology and techniques can reduce costs and Effective environmental broaden environmental and management requires the economic impacts. Recy- participation of several insti- cling, waste minimization, tutions: local governments by-product recovery, and to plan and carry out pollution prevention com- projects; national-level agen- “Grant approval was plemented EAPS pollution cies to set policy, establish sometimes affected by abatement and treatment ef- regulatory frameworks, and political and personal forts. Likewise, improved ensure compliance; public factors and had less to techniques to package loan and private sources such as do with the merits of applications and analysis of banks and funds to provide the environmental the technical, economic, and financing; and a vibrant pri- upgrade.” financial merits of projects vate sector to provide tech- and alternatives result in nical assistance and project better environmental prior- construction. EAPS directed ity setting and decision- its efforts at improving fund capabilities and making. EAPS strengthened the loan package developing municipal capacity to secure concept and provided analytical support to the needed financing. environmental fund. It promoted projects that recovered waste heat and converted combus- From the outset, environmental fund assistance tion sources from coal to natural gas. And it de- was geared to improve transparency by recom- veloped models for municipal financial mending operational changes that would en- analysis and gas pipeline valuation. EAPS did hance communications with grant applicants. not directly provide engineering or similar as- Still, some municipalities claimed that grant ap- sistance. proval was too often affected by political and personal factors and had less to do with the IMPACTS merits of the environmental upgrade. In response, EAPS put more emphasis on proper Environmental programs, although often fund procedures for project technical and finan- designed with very different objectives, have cial analysis. Project personnel also carried out outcomes that fall into four broad categories. several valuable studies on loan guarantee pro- Institutional impact revolves around the estab- grams that would strengthen the fund’s ties lishment and strengthening of institutions to with commercial banks. design, evaluate, undertake, monitor, finance, enforce, and regulate environmental activities. Regarding municipalities, EAPS emphasized Environmental impact helps improve air and helping the jurisdictions prepare the entire loan water quality and maintain or enhance 7 biodiversity as well as terrestrial, freshwater, cent, expanding fund financing capacity and marine ecosystems, at the national and glo- and reducing risk. With the reduction to bal level. Human health impact is associated with 60 percent, the same amount of fund preventing disease and promoting healthful liv- money now generated an additional ing conditions. Economic impact includes all out- $24 million in environmental projects. comes directly valued in the marketplace and incurred directly by project participants and I Increased efficiency. The fund’s internal effi- those borne by additional parties (not captured ciency was increased by making analysis in the financial analysis), such as social- and proceed simultaneously in several depart- health-related costs. ments rather than sequentially. In the past, sequential analysis had created bottlenecks Institutional Impact: A Mixed Bag and last-minute, ill-conceived decisions.

Conceptually, there are a number of ways a I Set more realistic loan terms. The fund length- project can bring about institutional impacts. It ened the loan term from 5 years to a more can introduce new techniques. It can train reasonable 10. people, provide them with skills, and assist them in transferring ideas and technology. And I Increased revenues. The fund started charg- it can help change the way institutional leaders ing an interest rate on all noncommercial and visionaries view their world. loans. As a result of charging 3 percent on noncommercial loans beginning in 1998, EAPS attempted to do this at two levels—the revenues increased an estimated $739,000, environmental fund and the municipality. The or 0.8 percent of the total. result was mixed. The CDIE team found strong evidence that the environmental fund was I Established sound practices. The fund was strengthened as a result of EAPS participation. now able to strengthen its loan guarantee It found little evidence, though, that municipali- programs with commercial banks by estab- ties or local consulting companies that per- lishing clearer lending procedures. formed feasibility studies were strengthened. I Developed improved screening criteria. The The project provided the fund with policy and fund was now able to develop and use operational advice and hands-on guidance in better criteria for screening applications. pivotal operating areas. It prepared nearly a dozen targeted studies designed to help fund I Increased transparency. EAPS helped increase managers move toward policy and operating the general openness of the fund. Recom- improvements. The studies ranged from the mendations of project officers led the fund basics of loan guarantees to detailed analyses to publish its procedures, provide appli- of loan procedures. Overall, the institutional cants more routine access to fund staff, and effects on the fund were very positive. The stud- provide more feedback to pending fund ies and the day-to-day assistance of an onsite applicants when screening and other crite- adviser led the fund to make many productive ria changed. changes. For example, the fund At the municipal level, the impact of EAPS on I Reduced grant subsidies. The amount of institutions was less evident. EAPS support was grants given to applicants was reduced reported to result in loans valued at $8.9 mil- from 80 percent of project value to 60 per- lion, but the actual amount that can be attrib- 8 uted directly to project assistance is unclear. Many municipalities indicated they would Table 1. EAPS Pollution Reductions have been able to obtain grants from the fund Pollutant Reductions without EAPS assistance. Some were under Municipality (tons per year) Clean Air Act regulation and were forced to reduce pollution regardless. Others felt that EAPS Particulate Sulfur Nitrous assistance was helpful in that it reduced their Matter Dioxide Oxide (SO ) (N O) costs because the project paid for services the 2 2 city otherwise would have had to incur. Fewer Bilina 12.1 30.2 4.1 municipalities cited EAPS assistance as the prin- Chomutov 15.0 11.1 1.4 cipal reason they eventually received environ- Krasna Lipa 51.0 72.8 16.6 mental fund loans. Liberec 74.0 116.1 20.5 11.9 Environmental Impacts: Ludgerovice 49.0 33.1 Petrovice U Reducing Air Pollutants Karvine 23.0 15.5 5.6 Polanka 74.3 32.8 7.2 EAPS environmental impacts were mostly positive. To be sure, the project had a direct impact Svinov 7.6 3.7 0.8 on the physical environment, but that impact Vratimov 106.0 178.0 48.0 was relatively modest at the municipal level Totals 412.0 493.3 116.1 compared with what was accomplished at the fund level. At the municipal level the project worked primarily to promote fuel switching, emissions attributable to switching fuels, is that from dirtier lignite to natural gas in district and air quality improved in EAPS-assisted munici- residential heating systems. In some instances palities. those interventions brought the municipality into compliance with the Clean Air Act. In oth- EAPS municipal interventions may have had an ers, the conversions resulted from citizen pres- impact locally, but SO2 and N2O are widely sure for a cleaner environment. transported over areas spanning several municipalities and are thus of regional concern as Table 1 presents the estimated emission im- well. It is therefore important to consider the provement as a result of the interventions at the regional effect of EAPS municipal interventions. local level. Individual reductions are important To address this, the team compared EAPS- only insofar as they contribute to improved assisted reductions with the total that occurred ambient air quality. EAPS activities had two regionally. Data were available only for the important environmental impacts. First, they Black Triangle part of the Czech Republic, reduced the pollutant load outdoors and roughly corresponding to northern Bohemia. thereby improved air quality. Second, when the Table 2 presents reductions in three major air environmental upgrades addressed residential pollutants over the project period for the Black use, indoor air quality also improved. Triangle and for the EAPS-assisted projects in northern Bohemia. As a percent of emissions The CDIE team encountered problems of quan- avoided, the EAPS contribution was small. This tifying EAPS environmental impacts: shared probably reflects the fact that EAPS assistance airsheds, lack of baseline data, no ambient air was targeted to small cities and typically in- quality measures. Still, the team’s opinion, volved extending natural gas pipelines (but not based on interviews, site visits, and changes in building new ones) or converting only a lim- 9 ited number of residential coal users to natural gas. Table 2. Tons of Emissions Reduced Annually There was already a trend during this period Particulate of improved air quality throughout the Czech Matter SO N O Republic. This resulted from a number of fac- 2 2 tors: closure of older industrial facilities, cleaner EAPS northern power plant operations, stringent environmen- Bohemia 152 230 42 tal standards and their enforcement, and the Czech Black availability of capital from the State Fund for Triangle 19,000 283,000 7,000 the Environment. Since 1989, particulate mat- EAPS % of ter, SO2, and N2O have fallen by more than 83 Czech Black percent, 72 percent, and 74 percent, respectively, Triangle 0.80 0.08 0.61 in the Black Triangle.

As discussed previously, EAPS assistance to the municipal activities, pollution at the source was environmental fund increased the overall reduced. Whether this had any effect on health investment in environmental projects by reduc- depends on many factors, including the level ing the grant allocation. This led to an addi- of pollution, other sources of pollution, local tional $24 million in environmental invest- topography and climate, and the type of pollu- ments. The precise environmental impact tion. Particulate matter under project conditions depends clearly on the types of projects fi- can be considered mostly a local pollutant. In nanced with the additional funds. Since this in- many of the EAPS-assisted sites, the team con- formation was not available, the team estimated cluded that most sources of particulate matter additional pollution reductions per thousand were reduced. The key to health impacts re- dollars for all environmental fund–supported volves around how this translates into improve- projects (ratios were determined from data in ments in ambient environment. These data were table 2). These coefficients for particulate mat- simply not available. ter, SO2, and N2O were then multiplied by the additional $24 million credited to EAPS to yield Economic Impact: Fund a total additional annual reduction in air pol- Outpaces EAPS-Assisted Cities lution of 6,400, 7,900, and 980 tons of particulate matter, SO , and N O, respectively. Of 2 2 The economic impact of the EAPS project can be course, this amount is not fixed but is a func- measured in two ways: in the marketplace it- tion of the total amount the fund provides in self and, more broadly, in the general benefits grants. that accrue. The former includes the USAID assistance costs as well as the cost of equipment Health Impact: Modest (for example, the new boiler for using natural But Immeasurable Gains gas versus coal, or the cost of the pipeline to bring gas). It also includes the cost of equip- There has been a health impact from direct ment operation and maintenance. The latter municipal interventions, but owing to a lack of occur as individual sources of air pollution are data it is not measurable. Moreover, the effects reduced and the ambient environment im- are small relative to other categories. Human proves. This improvement then benefits human morbidity and mortality are affected by changes health, monument preservation, animal and in ambient air quality. As a result of EAPS’s plant productivity and reproductive health, the 10 Table 3. Cost of Reducing Pollution

Project Upgrade Cost

Particulate

Matter SO2 N2O

EAPS municipal interventions $845,300 412.1 493.4 116.2

All environmental fund air projects $566,170 15,056 18,651 2,321

Tons of Pollution Reduced per $1,000 (estimate)

EAPS municipal interventions 0.05 0.06 0.01

All environmental fund air projects 0.27 0.33 0.04 ecosystem, and global climate change. These One possible explanation for part of this big impacts, although often not directly valued in difference is that the average environmental the marketplace, are part of the fuller economic fund intervention was larger than the average analysis. municipal intervention and that economies of scale come into play. Another possible expla- Regrettably, the data were not available to con- nation is that pollution reductions are based on duct such a complete economic cost–benefit estimates, both at the fund and in municipali- analysis. Instead, cost effectiveness was mea- ties, and that cities overestimated pollution re- sured. This is justified since emissions reduc- ductions to sweeten the odds for loan approval. tions were and remain a national objective and As noted earlier, the applications go through a would have proceeded regardless of the out- fund technical review. For the most part, the ap- come of a complete cost–benefit analysis. Given plications cover similar simple technologies that the efforts to reduce emissions were inevi- that are mostly conversions from coal to gas. table, the question is, How effective were they A simple comparison of the amount of fuel used relative to the cost incurred? (coal displaced) can provide a quick estimate of pollution reduction for major pollutants. The Table 3 presents the cost of reducing pollution fund review committee is skilled in this basic for EAPS-assisted municipal interventions com- technique. While the team does not believe this pared with all those approved by the fund. As to be a major source of the variation between the data indicate, all environmental fund EAPS and all environmental fund interventions, projects reduced 0.27, 0.33, and 0.04 tons of par- it can account for some portion of the difference. ticulate matter, SO2, and N2O, respectively, for every $1,000 of project cost. That compares with If the question is, When faced with limited only 0.05, 0.06, and 0.01 tons of particulate mat- development assistance, where should USAID ter, SO2, and N2O, respectively, for EAPS-assisted provide its help to obtain the greatest impact municipal interventions. on air quality? the fund was clearly the better choice. As table 3 shows, EAPS-assisted munici- 11 pal projects reduced pollution by much less 980 tons, respectively (figures based on one (about one fifth that of all environmental fund year’s leveraging). projects) for each $1,000 spent. The team’s view is that USAID’s investment gen- We now summarize the results of the two proj- erated larger and longer lasting developmen- ect approaches. At the municipal level, EAPS tal benefits at the fund level than at the spent $650,000. From that investment it municipal level.

I Mobilized a one-time $3.2 million invest- PROGRAM PERFORMANCE ment in new capital for environmental projects Program performance is assessed as to 1) effectiveness, 2) sustainability, and 3) replicability. I Reduced annual pollution of particulate

matter, SO2, and N2O by 412, 493, and 116 Effectiveness tons, respectively Effectiveness is a measure of how well the in- I Trained 22 municipalities in how to com- tended development assistance met the stated plete loan applications for the environmen- project objectives. Overall institutional capac- tal fund ity was significantly strengthened at the State Fund for the Environment. The fund reported I Strengthened the professional ties between carrying out most EAPS operational recommen- municipalities, consultants, and the fund dations for financial improvement. This was confirmed by a 1998 external evaluation of the I Strengthened one local nongovernmental fund by the Organization for Economic Coop- organization, the Foundation Project North eration and Development. Additionally, the fund reported that working closely with the I Created the conditions for another consult- EAPS resident adviser greatly enhanced its over- ing company to work with municipalities all institutional credibility with a wide range in project preparation and packaging. of financial and governmental institutions.

At the environmental fund level, EAPS spent For example, EAPS assistance significantly $750,000. From that investment it strengthened application financial reviews and reduced loan processing times. As a result, the I Increased operating efficiency fund was able to support more environmental investments. As recommended by EAPS, the I Increased the public stature of the fund fund also decreased the grant portion of total project costs, used the latest cash-flow-manage- I Increased the viability of the fund and re- ment software, lowered interest rate subsidies, duced its operational vulnerability and charged interest on municipal loans. To- gether, these changes further improved the I Mobilized an annual increment of $24 mil- fund’s loan-processing and loan-guarantee pro- lion in environmental projects support by grams. There is good evidence that EAPS sup- the fund port enhanced the fund’s effectiveness, and this allowed the fund to support more projects, thus I Reduced annual pollution of particulate increasing the potential for environmental ben-

matter, SO2, and N2O by 6,400, 7,900, and efits. 12 Municipalities did not always see these insti- gram, EAPS assistance helped make the fund a tutional improvements translated into signifi- more stable financial institution. Charging in- cant service upgrades. Most EAPS-assisted terest on noncommercial loans also increased municipalities indicated that they had better ac- the fund’s revenue stream, further strengthen- cess to fund officials after EAPS. But difficulties ing its longer term financial capability. remained when checking on the status of their loan applications. Moreover, municipalities With respect to institutional sustainability, EAPS indicated that the period of time between sub- assistance changed a pivotal fund operational mitting an application and receiving a response procedure such that the technical evaluation di- had not yet decreased noticeably. vision and credit policy division now work together in a much more The project’s municipal inefficient manner and are stitution capacity building likely to continue to do so. efforts were much less effec- By working closely with the tive. That is, many munici- fund, EAPS managers in- palities reported that EAPS creased fund credibility, assistance was not critical to critical to ensuring the their securing environmen- longer term viability of what tal fund financing. Financing “EAPS support was still a relatively new in- of feasibility studies and or- enhanced the fund’s stitution. ganizing training sessions effectiveness and did not significantly im- this allowed the In contrast to the likelihood prove their ability to carry fund to support of fund operational sustain- out technical, financial, and more projects.” ability, EAPS assistance to environmental project eval- municipalities preparing uations. This observation is loan applications is likely to supported by the lack of a have little long-term effect. real difference between loan approval rates. The When EAPS and municipal staff met, the techni- rate for EAPS-assisted municipalities was 40.9 cal assistance could have had a more lasting im- percent; for non-EAPS-assisted municipalities, pact. In only a few cases did EAPS and municipal 41.3 percent. Municipalities did, however, staff actually work together on the applications. greatly value EAPS’s facilitation role with their In most cases where EAPS staff helped with the application, which provided them with greater application, they did it independently; thus, access to the fund. EAPS assistance was viewed municipal staff had less of an opportunity to as useful in only a few cases. develop skills for future applications.

Sustainability Feasibility studies financed by EAPS also did not build substantial municipal capacity in Sustainability refers to the degree to which a technical, financial, and environmental project program continues to provide benefits beyond evaluation. But such assistance did help some the end of development assistance. By reduc- local consultants who carried out the studies. ing the grant portion of total project costs from Financing municipal feasibility studies neither 80 to 60 percent, the fund was able to better pre- enhanced the ability of the municipality to con- serve its financial resources, thus contributing duct its own studies nor increased the chances toward its longer term financial sustainability. that the municipality would be able to obtain By helping improve the loan guarantee pro- financing for future studies. 13 An alternative strategy might have been to work proach was similar—namely, to strengthen do- with the environmental fund and encourage it mestic environmental funds and help munici- to provide loans for feasibility studies, with the palities get loans for environmental upgrades. understanding that the loan could be included Another reason to obtain additional informa- in the overall project cost should the project be tion from Poland was the report that the Polish fund financed. Otherwise, the loan could be State Fund for the Environment and several re- paid back at below-market rates of interest. By gional environmental funds (absent in the providing consultants with an opportunity to Czech Republic) were playing a much more work with a number of municipalities, EAPS catalytic role. With this in mind, the team con- helped them showcase their services. In addi- ducted a limited number of site visits in Po- tion, the consultants themselves recognized the land that looked mainly at the regional funds. growing need for this sort of consulting. In contrast to the Czech Republic, there are three Replication basic categories of domestic environmental funds, not just a single state fund. At the na- Replicability refers to whether the assistance tional level there is the National Fund for provided to targeted municipalities has spread Environmental Protection and Water Manage- to others. The issue of replicability does not ment. At the provincial and regional level there neatly apply at the fund level, because while are 49 voidvodal, or regional, funds. At the there are thousands of municipalities in the municipal level, there are more than 2,000 lo- Czech Republic, there is only one state environ- cal environmental funds. Like the Czech fund, mental fund. The team could find no evidence the Polish funds typically use grants as a way of financing environmental upgrades. The team for EAPS replication at other municipalities. This did not appear to be an explicit project strat- visited two of the largest and most active funds: egy. When the team observed replication, it was the Krakow and Katowice Voidvodal Funds. from municipalities sharing general informa- The Krakow Voidvodal Fund, now almost five tion and could not be directly linked to any EAPS activity. Notably, cooperation between munici- years old, benefited significantly from EAPS as- palities was limited in the northern Bohemian sistance. Before EAPS, the fund had in place ap- sites but common in northern Moravia. Espe- plication screening procedures that weighed cially notable in this regard is one EAPS-assisted both ecological and financial project merits but municipality (Ludgerovice) that belongs to an relied less on actual (and therefore quantifiable) association of towns and villages from former pollution measures. With project assistance the Prussian areas. Through regular meetings, these fund was able to better quantify environmen- municipalities exchanged limited information. tal impacts associated with each proposed upgrade using a computerized model provided by an EAPS implementer. As a result, the fund POLAND reported it was much better able to prioritize applications and award grants. This cash-flow There was considerable interest in obtaining model was later adopted by other voidvodal added field information about EAPS in neigh- funds and the national fund, with the Krakow boring Poland, where the project has also closed fund taking the lead to help introduce and ap- out. EAPS began somewhat later and lasted ply the model. somewhat longer in Poland. The budget for EAPS Poland was $2.75 million, twice that spent The Krakow fund also reported a significantly in the Czech Republic. The overall EAPS ap- better application approval rate from munici- 14 palities receiving EAPS investment packaging tently. EAPS also helped the Katowice fund assistance (almost 90 percent), compared with showcase its competencies and increase its out- non-EAPS-assisted applications (67 percent). reach through central and eastern Europe fund Quantifying environmental impacts had an- training and workshops for other municipal other positive effect on the fund. Before EAPS, governments. The fund continues to hold these there was a tendency for the fund’s board to workshops. In this way, it continues to provide become more involved in grant decision-mak- valuable loan application guidance to munici- ing. After EAPS support, the board relied much pal governments. However, the fund stressed more heavily on the recommendations of fund that EAPS assistance really benefited the munici- financial and technical specialists, thus making palities more by helping improve the quality the final grant decision-making less subject to of their applications submitted and only indi- non-merit-based influences and thereby rein- rectly affected fund operations. Several key forcing fund transparency. fund personnel emphasized that the quality of loan applications from EAPS-assisted munici- The Krakow fund clearly benefited from EAPS palities was far superior to those before EAPS assistance and was able to transfer what it assistance. That, they said, made their job of learned to help other funds. It already had a evaluating applications much easier. well-defined set of technical procedures for as- sessing creditworthiness in place before EAPS The investment climate for environmental up- assistance and made no mention of using the grades in Poland appears to have been much EAPS cash-flow model. The fund lacked preci- more robust than in the Czech Republic. Thus, sion in estimating environmental impacts, quite naturally, the overall success of environ- though. EAPS appeared to fill that need, and it mental financing was much higher. The demand enabled the fund to transfer the acquired skills for Polish environmental financing has been to other institutions. growing since the 1990s, and the role of domestic environmental funds has increased propor- The Katowice fund serves an unusual voidvod tionately. In such a dynamic market, it is hard in that the region is highly urbanized and in- to say with any precision what role EAPS Po- dustrialized. One fifth of national industry is land played in strengthening funds and facili- located in the Katowice voidvod. A variety of tating investment packaging without a more projects are considered for funding. They in- detailed full-scale study. At the same time, the clude environmental education (notably Earth team came away with the strong impression that Day activities), forest protection, flood preven- EAPS Poland had scored major accomplish- tion, environmental monitoring and control ments. The voidvodal and other fund manag- systems, residential and industrial waste man- ers acknowledged receiving helpful support agement, and projects that reduce air, water, and from EAPS and could cite specific contributions noise pollution. EAPS worked with the fund in such as training and selected model use. More a number of ways. important, they were able to put that technical assistance to use by helping train other funds. The Katowice fund cooperated with EAPS to develop a computerized cash-flow planning Compared with the Czech Republic, fund ap- model and another impact model to collect and plication procedures in Poland appear to be confirm data on project environmental impacts. better documented and more widely commu- The team found no evidence to confirm the use- nicated. Participant outreach is considered rou- fulness of the cash-flow planning model but did tine rather than rare. In short, the funds appear find that the impact model was used consis- to go out of their way to help applicants pack- 15 age their investments without actually doing it palities regulated by the Clean Air Act, com- for them. pliance was key. Progress switching from coal to gas and the pace of district heating improve- The team left with the strong impression that ments would have been much slower, if they regional funds in Poland have definite advan- occurred at all, without the act. EAPS implemen- tages over a national fund. The regional funds tation was well timed. Its effectiveness would appear more flexible, are closer to the environ- have been seriously compromised had it pre- mental stresses, and can more easily provide ceded enactment and enforcement of the Clean technical support. In short, regional funds are Air Act. closer to their customer base and may provide better service. The international donor commu- 2. Domestic environmental funds can be vital finance nity and many partner organizations have long sources for municipal projects in transition countries. advocated a more decentralized approach to The greatest impact of the EAPS project was at government services. Polish regional environ- the State Environmental Fund, through the mental funds would seem to fit that model well. work of a resident adviser and related technical assistance studies. These led to improved LESSONS LEARNED procedures and the adoption of policies to reduce subsidies and improve loan guarantees. The EAPS project in the Czech Republic and in Notwithstanding the increased participation of Poland yielded a number of lessons for the CDIE other sources of project financing through loan evaluation team. They are guarantees and interest rate subsidies to commercial banks, environmental funds are still 1. Environmental regulations and meaningful en- needed. They play the additional role of being forcement are necessary first steps for improving air a policy instrument to implement projects that quality. Often, one of the first questions faced take into account environmental and social pri- by program designers is whether a regulatory orities. Even with improved technical and fi- framework already exists. When EAPS began in nancial analytical procedures, the fund will be the Czech Republic in March 1995, the Clean handicapped if its approval of financing is af- Air Act had been in existence for several years. fected by political factors, if it is perceived as The act required industries and municipalities not transparent and open, or if its communica- generating more than 5 megawatts of electric- tion with municipalities is inadequate. These ity to reduce emissions according to a well- problems tend to be more manageable for re- defined compliance schedule. Failure to com- gional funds than for national-level funds. ply meant swift and harsh penalties, fees, and ultimately cease-and-desist orders. Many pol- 3. The right kind of environmental investment evalu- luting industries were shut down, and larger ation and packaging can be effective. One of the polluting municipalities began to take action. major impediments to increased environmen- Smaller municipalities were less well equipped tal management—especially for municipali- financially and technically to respond. ties—has been the unavailability or high cost of funds for environmental upgrades. On the When asked why they undertook environmen- other side of the issue, the capability of mu- tal upgrades, the overwhelming number of city nicipal project sponsors to provide investment managers pointed to the Clean Air Act. (Also information in a form that banks or environmen- cited were citizen complaints about poor air tal funds can use to make lending decisions is quality and high costs associated with ineffi- also important. According to EAPS project per- cient, outdated heating operations.) For munici- sonnel, and to city leaders interviewed, munici- 16 pal technical assistance was of little interest or lication strategy is planned and implemented, use, for three reasons: 1) Larger municipalities the likelihood of spreading know-how to other claimed they already had the expertise. 2) Most entities will be low. municipalities believed the fund’s approval process was arbitrary and political, so educa- 5. The dual purpose of environmental funds must be tion or better packaging did not necessarily emphasized. Technical assistance often dwells on improve rates of success. And 3) smaller mu- the financing aspects of a fund by addressing nicipalities were not given sufficient hands-on credit policies, risk diversification, financial experience to learn the process. analysis, and operating procedures. These are indeed worthy areas to target. But environmen- Thus, EAPS’s training in project packaging was tal funds are also a means of subsidizing so- undermined by both its targeting strategy and cially desirable environmental investments. its hands-off nature. City officials in the Czech Many of the benefits of mitigating environmen- Republic and Poland made a strong case that tal damage or managing resources properly do environmental investment packaging was in- not accrue to those that incur the costs. There- deed needed. They pointed out that such as- fore, rate of return on these activities is often sistance was best utilized when the fund offered below that which is needed in a market the training as part of an overall outreach ef- economy, and less investment is undertaken fort—not just a stand-alone component. than is socially desirable. In-depth interviews with a broad range of participants confirmed 4. To be effective, replication requires an explicit, up- that government intervention is necessary to front strategy. Replication of technical assistance increase societal welfare. This aspect of a fund’s at the municipal level can be accomplished in role is often overlooked and should be consid- one of two ways. The first is to develop high- ered and strengthened in fund policy and op- quality assistance products (such as manuals) erations. Both project screening and the on how to prepare loan applications, examples allocation of subsidies offer a perfect venue for of successful applications, and specific tem- strengthening societal welfare as an aspect of a plates for different kinds of projects, such as fund’s purpose. coal-to-gas conversion of boilers, district heating, and wastewater. The distribution of these For example, at the Czech Fund the cost per unit products beyond the target municipalities can of pollution abated is one screening technique. lead to more replication. The other way to in- A problem arises because the fund uses the sub- crease replication is to target groups of munici- sidized price of natural gas rather than the cost palities (such as municipal associations) so to the economy. This could result in the exclu- members can spread the word. Combining sion of some projects, such as waste heat to en- these two approaches is also possible—for ergy, where the cost per unit of pollution example, developing high-quality assistance reduced may be higher than the subsidized cost products and disseminating them through of natural gas. municipal associations. Unless an explicit rep-

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