Targeting the Environmental Investment Challenge in South Eastern Europe Targeting the Environmental Investment Challenge in South Eastern Europe Written by Joanna Fiedler and Eniko Artim November 2005 Szentendre, Hungary Funded by the European Commission About the REC The Regional Environmental Center for Central and Eastern Europe (REC) is a non-partisan, non-advocacy, not-for-profit international organisation with a mission to assist in solving environmental problems in Central and Eastern Europe (CEE). The REC fulfils this mission by promoting cooperation among non-governmental organisations, governments, businesses and other environmental stakeholders, and by supporting the free exchange of information and public participation in environmental decision making. The REC was established in 1990 by the United States, the European Commission and Hungary. Today, the REC is legally based on a charter signed by the governments of 28 countries and the European Commission, and on an international agreement with the government of Hungary. The REC has its head office in Szentendre, Hungary, and country offices and field offices in 16 beneficiary countries which are: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, the former Yugoslav Republic of Macedonia, Poland, Romania, Serbia and Montenegro, Slovakia, Slovenia and Turkey. Recent donors are the European Commission and the governments of Austria, Belgium, Bosnia and Herzegovina, Canada, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Italy, Japan, Latvia, the Netherlands, Norway, Poland, Serbia and Montenegro, Slovenia, Sweden, Switzerland, the United Kingdom and the United States, as well as other inter-governmental and private institutions. The entire contents of this publication are copyright ©2006 by the Regional Environmental Center for Central and Eastern Europe No part of this publication may be sold in any form or reproduced for sale without prior written permission of the copyright holder ISBN: 963 9424 40 4 Published by: The Regional Environmental Center for Central and Eastern Europe Ady Endre ut 9-11, 2000 Szentendre, Hungary Tel: (36-26) 504-000, Fax: (36-26) 311-294, E-mail: [email protected], Web site: www.rec.org Printed in Hungary by TypoNova Kft. This and all REC publications are printed on recycled paper or paper produced without the use of chlorine or chlorine-based chemicals. The views of the authors in this publication do not necessarily reflect the views of relevant governmental organisations or the Regional Environmental Center for Central and Eastern Europe. Contents Foreword from the EC 7 Foreword from the REC Executive Director 9 Executive Summary 11 Authors and Acknowledgements 29 Abbreviations 33 Chapter 1: Introduction 37 Objectives of the book 39 Scope of the publication 40 Methodological approach 41 General approach 41 Tools for methodology implementation 42 Main limitations 42 Methodological issues in the chapters of the publication 43 Structure of the publication 46 Chapter 2: Setting the Scene 49 Reforming the countries 51 Economic reforms 52 Legislative reforms 53 Institutional reforms 54 Supporting reforms implementation 55 Financing sources 55 Domestic financing sources 55 Foreign sources of finance 57 Private sector involvement 57 Environmental infrastructure developments 58 General observations 58 TARGETING THE ENVIRONMENTAL INVESTMENT CHALLENGE IN SOUTH EASTERN EUROPE 3 TABLE OF CONTENTS Chapter 3: Infrastructure Investment Challenge 63 Investment needs and benefits 65 Infrastructure investment implications of the EU directives 65 Air sector 66 Waste sector 69 Water sector 73 General observations 76 Chapter 4: Targeting the Investment Challenge 79 Government planning for legislative and institutional frameworks 81 Air sector 83 Waste sector 83 Water sector 84 General observations 84 Project identification 112 Overview of infrastructure identification in SEE 112 Approaches to infrastructure project identification 112 General observations 119 Project formulation 119 Overview of project formulation issues in SEE 119 Lessons learned 123 Obstacles to municipal project financing 124 How to overcome the obstacles: selected issues 127 Developing bankable projects 139 Overview of the fiscal space in SEE 140 Borrowing by municipalities: regulatory Issues 141 Borrowing by municipalities: open regulatory issues 142 Loan application process and bank relations 143 General observations 144 Chapter 5: Response to the Challenge: Lists of Priority Projects 149 Developing the lists of projects 151 Results of the update 152 Prioritisation of projects on the list 155 General observations 158 Presentation of lists of projects 160 4 TARGETING THE ENVIRONMENTAL INVESTMENT CHALLENGE IN SOUTH EASTERN EUROPE TABLE OF CONTENTS Chapter 6: Foreign Sources of Finance 195 Sources of grant support 198 Financial assistance from the European Union 198 Bilateral donors 202 Sources of loan support 208 The European Bank for Reconstruction and Development 208 The European Investment Bank 209 The Council of Europe Development Bank 210 The World Bank 211 Cooperation initiatives of the donor community 213 Infrastructure Steering Group 213 Project Preparation Committee 214 United Nations Environment Programme Finance Initiative 215 General observations 215 Chapter 7: Conclusions and the Way Forward 219 Mitigating environmental pollution in SEE 221 Role of the EU accession process 221 Available sources of finance 222 Status of environmental infrastructure in SEE 223 Strategic approach 223 Key barriers 223 Addressing barriers 227 Securing domestic sources of finance 227 Improving efficiency of project preparation 228 Improving conditions for borrowing 229 Enabling involvement of the private sector 229 Options for strategic action 229 The short-term approach – one to two years (2006-2007) 232 The medium-term approach – up to five years (2006-1010) 233 The long-term approach – more than five years 234 Annexes 235 Annex 1: Assistance provided in the Frame of Priority Environmental Investment 237 Annex 2: Municipality Financing of Investment Projects and Bankability 241 TARGETING THE ENVIRONMENTAL INVESTMENT CHALLENGE IN SOUTH EASTERN EUROPE 5 TABLE OF CONTENTS Annex 3: Results of Prioritisation Exercise 249 Annex 4: Examples of Hot Spot Strategies 265 Annex 5: Project Identification Form for Waste Sector Projects 273 Annex 6: Donor Fiches 279 Annex 7: Contact Information for International institutions 297 Annex 8: Data Used in Methodology 305 List of References 309 6 TARGETING THE ENVIRONMENTAL INVESTMENT CHALLENGE IN SOUTH EASTERN EUROPE Foreword from the European Commissioner for the Environment In recent years, the countries of the Western resources — especially private funding — to Balkans have made considerable progress with ensure compliance. In this context, the process of stabilisation and reconciliation, internal reform identifying, preparing, financing and implement- and regional cooperation within the framework of ing the many environmental investment projects the Stabilisation and Association Process (SAP). needed for EU membership is crucial. The region is becoming more stable and its coun- In addition, experience shows that environ- tries are engaged in ambitious political and eco- ment ministries in candidate countries have tradi- nomic reform programmes based on European tionally not been responsible for identifying com- Union law and practice. pliance gaps and preparing detailed investment One major challenge for those countries that plans. They have had to face the same difficulties now have the real prospect of accession to the in preparing concrete and realistic implementation European Union is meeting the EU’s environmen- strategies as those the countries of South Eastern tal requirements. Europe are facing now. Alignment with existing EU legislation and So I welcome this clear analysis of environmen- compliance with new standards requires substan- tal infrastructure investment planning in the South tial financial resources and well-targeted alloca- Eastern Europe countries. It should assist them in tion of often very scarce public funds. Drawing on developing the right strategic approach towards its past experience with enlargement, the Com- achieving our environmental objectives and help mission always stresses that candidate countries them move closer to the European Union. need realistic long-term strategies for implementa- tion of EU legislation. They should also mobilise Stavros Dimas significant domestic and foreign financial European Commissioner for the Environment TARGETING THE ENVIRONMENTAL INVESTMENT CHALLENGE IN SOUTH EASTERN EUROPE 7 8 TARGETING THE ENVIRONMENTAL INVESTMENT CHALLENGE IN SOUTH EASTERN EUROPE Foreword from the REC Executive Director It is with great pleasure that I present this pub- ing resides within the countries themselves. lication to the beneficiaries, donors, partners and I do hope that the proposed way forward for friends of the Regional Environmental Center for securing domestic sources of finance, improving Central and Eastern Europe (REC). the efficiency of project preparation and the con- Since the endorsement of the Priority Environ- ditions for borrowing, as well as for enabling pri- mental Investment Programme for South Eastern vate sector involvement, creates a good platform Europe in 2003, the REC has been continuously for coordinated joint action by the national and working to strengthen the institutional capacity in international environmental