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The Environmental Challenge of EU Enlargement in Central and Eastern Europe

Chapter 6
Sources of Environmental Financing Before and after Accession

The CEE Candidate Countries have already received a wide range of environmental assistance from the European Union, bilateral donors such as Denmark, and the international financial institutions (IFIs) such as the EBRD and the World Bank. Most of the assistance in the early 1990s was socalled technical assistance, i.e. training workshops to acquaint civil servants with Western European environmental protection practices or support for developing the administrative capacity of environmental ministries. In the past few years, recognition of the importance of supporting public sector investment in environmental infrastructure has grown.

The Countries' own sources

From the beginning of the accession process, the EU has said that at least 90% of the cost of environmental investments needed for EU accession had to be borne from the countries' own sources.

However, as Figure 4.1 on page 10 of this report shows, the CEE applicant countries already expend on average twice the proportion of their GDP for environmental protection in comparison to the rates expended in EU Member States. So it is not immediately evident how they will find the additional resources.

Almost all of the CEE applicant countries have set in place specialised environmental funds to raise financing for environmental purposes. The funds are operating at national and/or local level and are typically based on systems of pollution fees and penalties.

Poland's system of environmental funds, established in 1989, has been especially effective, particularly for financing of municipal infrastructure such as waste water treatment and solid waste management facilities. The National Fund for Environmental Protection and Water Management and the related voivodship (regional), powiat (county) and gmina (municipal) environmental funds supply an estimated 40% of the financing for environmental protection in Poland.

The environmental funds in other CEE applicant countries have found it difficult to repeat Poland's success in generating large amounts of domestic capital, but have played other important roles in facilitating environmental investment, including support for project preparation and for management of donor-financed projects.

Bilateral donors

Assistance from bilateral donors has continued to be important for the applicant countries' accession preparations in the environment sectors. Among the EU Member States, the Dutch, British, and German assistance programmes have been important sources of technical assistance, but less so for investment. The Swedish and Finnish assistance programmes have also provided important technical assistance - in the case of Finland, on implementation of the Espoo Convention. They have also provided investment support but primarily for the Baltic States (and those parts of the Russian Federation impacting the Baltic Sea).

For the eight CEE applicant countries targeted under the DANCEE programme, (Bulgaria, Czech Republic, Estonia, Latvia, Lithuanin, Poland, Romania and Slovakia) Danish assistance has formed the largest source of bilateral funds. The DANCEE programme has provided at least 500 MEUR of financing over the past decade - at least half of it for investment in infrastructure projects such as waste water treatment and waste management.

Non-EU donors such as Norway, Switzerland, Canada, Japan and the United States continue to be at presence in the region. In recent years, even the non-European donors have supported the process of EU accession by using the EU environmental acquis as the standard.

International financial institutions

The World Bank has been a major source of environmental financing in the applicant countries, but with the successful transition to market economies for many, the World Bank has started to shift its financing activities east to the less economically developed CIS. The Bank prides itself on its willingness to take on difficult sectors, e.g. a rural development credit scheme in Poland is helping the national government to support, inter alia, waste water treatment and solid waste management projects in rural areas of Poland.

The European Bank for Reconstruction and Development (EBRD) was established in 1991, specifically to assist the CEECs and the CIS in economic restructuring and in promoting private entrepreneurship. From the beginning, support for clean-up of environmental "hotspots" has been a priority. The EBRD has a specific programme to assist municipalities in financing environmental infrastructure, such as treatment. In 1998-99, it joined with the EU and other IFIs to mobilise 900 MEUR of financing for investment projects in transport and environment. For example, the Maritsa flue gas desulphurisation plant in Bulgaria was co-financed by Phare, the EIB and the EBRD.The ERDB is alsom administering a programme to finance the decommissioning of several nuclear plants.

The Nordic Investment Bank (NIB) grants loans for public and private sector environmental investments in the regions neighbouring the Nordic countries. The loans are aimed at reducing environmental degradation and cross-border pollution, especially in the Baltic Sea.

The Nordic Environmental Financing Corporation (NEFCO) facilitates implementation of environmentally beneficial projects that would reduce transboundary effects to the benefit of the Nordic region. The current project pipeline focuses on municipal water and waste water treatment in Estonia, Latvia, Lithuania, Poland, and Russia.

European Union

The EU is the largest donor for the CEE applicant countries. As of 2000, the EU assistance totals 3.1 billion EUR a year for all 10 applicant countries. Three programmes of assistance have been established for these countries:

	The Phare Programme (1,560 billion EUR/year);
	SAPARD (520 million EUR/year);
	ISPA (520 million EUR/year for environment infrastructure, 500 million EUR/year for transport infrastructure).

The European Commission has in the past two years taken steps to decentralise the administration of these assistance programmes, assigning important functions such as project preparation, tendering and contracting to the central government of each applicant country. This devolution of administrative functions to the countries themselves is seen as the first stage of building local capacity to successfully administer post-accession Structural Funds and agricultural support facilities.

The Phare Programme was initiated in 1989 as a programme to support Poland and Hungary in (reconstructing) their economies. It quickly expanded to cover all of the CEE countries except the CIS. In Agenda 2000, the EU shifted policies so the Phare Programme, - which had previously focused 90% of its funding on technical assistance, allocated 30% to technical assistance, including "twinning projects". The remaining 70% of Phare assistance is now allocated for investment, particularly aimed at supporting economic development in the more impoverished regions of each Applicant Country.

The Phare Programme today has an annual budget of 1,560 MEUR and comes under the responsibility of the Enlargement Directorate General. It focuses entirely on the priorities set forth by the Candidate Countries in the Accession Partnerships, taking into account the progress made in the yearly Regular Reports from the Commission. It finances institution-building measures across all sectors, primarily through the Twinning Instrument, a mechanism which supports the placement of preaccession advisers (PAA) seconded from a Member State administration to work full-time in the corresponding ministry in the applicant country for at least one year.

Though twinning was launched in 1998, initial difficulties in implementation caused long delays before individual pre-accession advisers were placed into the applicant countries administrations. An assessment of the Twinning Instrument identified three major problems:⁽⁴⁶⁾

In mid-2001, the programme had become more operative. In some applicant countries, twinning is regarded as a valued mechanism to acquire practical experience in administration of the EU requirements. The experience in other applicant countries has been less useful.

At least half of the 70% of the Phare budget allocated for investment support now supports investment in integrated regional development programmes in each CEE applicant country. These programmes are becoming a significant source of funding for environmental infrastructure investment in rural areas where economic development is neede and are regarded as precursors for post-accession Structural Funds.

SAPARD finances agricultural and rural development from its annual budget of 520 MEUR and comes under the responsibility of the Agriculture Directorate General. In its effort to decentralise the management of SAPARD, the Commission expects each applicant country to establish a national SAPARD administration. But the technicalities of administering the SAPARD assistance have yet to be overcome by a number of countries, including Poland and Romania.

As of November 2001, only Bulgaria and Estonia had succeeded in gaining the conferral of management of SAPARD aid.⁽⁴⁷⁾ This raises some doubt as to whether the 520 MEUR budgeted for 2000 will be fully utilized, since SAPARD regulations require this allocation to be spent before the end of 2002.

It is possible in theory to finance certain types of environmental measures through SAPARD, including environmental protection at farm-level, agricultural water resources management, forestry and land improvement. However, SAPARD does not appear to be sufficiently utilized for environmentrelated purposes at this point.

The ISPA programme has an annual budget of 1,040 MEUR split 50/50 between major environmental and transport infrastructure projects. It comes under the responsibility of the Regional Policy Directorate General and is seen as a pre-cursor to a post-accession Cohesion Fund for the CEECs. ISPA resources have been tentatively allocated among the 10 CEE applicant countries on a formula based on population, per capita GDP, and land surface area, as follows:

ISPA financing is given on a first-come, first-served basis, so if a country fails to prepare enough good infrastructure projects to qualify for its share of resources, another country may be able to get projects financed.

Some donors, including Denmark, have had close cooperation with ISPA in project preparation and project implementation in several CEE applicant countries, including some cofinancing.

ISPA provides up to 75% co-financing, but only for environmental projects with a minimum budget of at least 5 MEUR. This threshold requirement has created difficulties for some of the smaller countries, e.g. the three Baltic States (Estonia, Latvia, Lithuanina), that have already financed many of the major waste water treatment plants in line with HELCOM obligations and are seeking to group smaller projects together to qualify for ISPA projects. Though ISPA has said this may be allowed, in practice the only groups of projects that have been approved (as of July 2001) have been a cluster of 6 landfills in Bulgaria, and four regional waste management projects in Hungary.

ISPA is designed to be the precursor to the Structural Funds that will become available following entry of the applicant countries. However, even before the programme has finished, concerns have arisen about how the programme is functioning. On the Commission side, there are concerns about absorption of ISPA financing and the ability of countries to develop a strategy and pipeline of properly prepared projects. On the side of the applicant countries, there are concerns about the appropriateness and application of criteria, the lengthy project development and approval process, and the degree of flexibility needed to meet the varying conditions in specific applicant countries. It would be very useful for the Commission, the applicant countries and the Member States to examine ISPA with a view to identifying lessons learned that would improve the use of post accession structural funds in the field of environment.

Assistance to upgrade nuclear standards in the CEEC is provided mainly via the PHARE and TACIS funds, the EURATOM loan facility, and the Nuclear Safety Account (NSA), administered by the European Bank for Reconstruction and Development (EBRD). The NSA was set up in 1993 to address urgently needed upgrades of those nuclear reactors which were not covered by bilateral assistance funds, i.e. RBMK and VVER 440/230 types. See note 19 for a list of the types of reactors that are covered by EU programmes. Coordination between assistance programmes lies within the Nuclear Safety Assistance Coordination (NUSAC) whose Secretariat is hosted by the European Commission.

The European Investment Bank (EIB) is an increasingly important source of EU-generated financing for the applicant countries. Since 1990, the EIB has lent 11.5 billion EUR to various projects in the ten CEE applicant countries, for transport and communications, energy projects, industry, and environmental protection. Though only 108 MEUR was lent to environment-related projects during the 1990s, the EIB is now becoming more of a player in environmental financing in the applicant countries, mostly for construction of waste water treatment facilities, particularly in Poland and Hungary as co-financing for ISPA projects.

Sources of financing after accession

Upon accession, applicant countries are expected to still have a financing gap. The CEE applicant countries will need to generate investment financing from their own sources in order to complete the environmental investments necessary to achieve compliance by the end of the negotiated transition periods. As new Member States, they will also benefit from significantly increased financial assistance from the EU. But these two sources of financing are not expected to be sufficient.

The amount of pre-accession support provided by the EU at this point for environmental investment seems like a large amount, until it is compared to how much the EU gives on a per capita basis for environment-related projects each year to Member States eligible for Cohesion Funds and Structural Funds.

ISPA, for instance, provides 520 MEUR each year for financing of CEE applicant country environmental infrastructure, which comes to 5 EUR per capita. By way of comparison, during the time period 1993- 1999, the EU through its Cohesion Fund gave approx. 1,404 MEUR a year to Spain, Greece, Portugal and Ireland just for environmental infrastructure, which comes to 22 EUR per capita ⁽⁴⁸⁾.

If one compares a CEE applicant country to a Cohesion Fund country with approximately the same population, the per capita disparity is much greater. For example, both Spain and Poland have populations of around 40 million. Whereas Poland will receive between 156-192 MEUR per capita a year through ISPA, Spain received between 842 and 892 MEUR per capita a year for environment.

Similarly, both Greece and Portugal have populations of around 10 million, also the size of Hungary and the Czech Republic. This year Hungary will get between 36 and 52 MEUR from ISPA, and the Czech Republic between 29 and 42 MEUR. In the time period 1993-1999, Greece and Portugal each got between 225 and 253 MEUR a year for environment - at least six times as much per capita.

Even more money is paid out by the EU through the Structural Funds, which have a budget of 213 billion EUR for the period of 2000-2006, or around 35.5 billion EUR per year. The Structural funds target financial assistance under three Objectives (93% of the budget) and four Community Initiatives (5.35% of the budget). Objective 1 covers development and structural adjustment of regions whose development is lagging behind (135.9 billion EUR). Objective 2 covers economic and social conversion of areas facing structural difficulties (22.5 EUR billion). Objective 3 covers adaptation and modernisation of national policies and systems of education, training and employment (24.05 billion EUR). The four Community Initiatives have a budget of 10.44 billion EUR.

Figure 6.1:
Comparison of annual allocations of EU funds for Poland (nonMember State) and Spain (Member State) 2000-2006

Phare, the equivalent EU programme for the CEE countries, has a total budget of 6.24 billion EUR for the same period. Phare aims to devote about half of the investment element (half of 70% of the whole, or approx. 350 MEUR a year) to economic and social cohesion. Nonetheless, its entire budget for the applicant countries represents less than 10% of the per capita support for the Objective 1 regions within the Union.

Commission sources report that the policy position of the past - that 90% of the environmental investment would need to come from the Candidate Countries themselves - now appears to be crumbling. There is political pressure to finish negotiations of the Environment Chapter for the leading accession applicants, even if they have not yet adequately documented how they will meet the EU requirements at the end of their transition period. DG Regional Policy officials are now reportedly working on policy documents to propose significantly increased post-accession funding through new Cohesion and Structural Fund-like instruments.

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