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Romania’s Road to Accession - The Need for an Environmental Focus

6. Financing Compliance with the EU Requirements, including Management of EUFunds

As this report has already emphasised, compliance with the EU investment-heavy requirements in the environment sector will pose an enormous financial burden for Romania, the poorest of the CEE candidate countries. The burden will fall on the private sector as well as on the public sector.

The best estimates to date for the public sector costs are those found in a 2001 study by the Ministry of Public Administration (MPA). The MPA –concerned about the demands on local governments to provide services in accordance with EU standards – undertook the development of a Strategy as to how municipalities might rise to the challenge. The Strategy¹⁰⁹ consists of a short-term strategy for 2001 – 2004, as well as a long term strategy until 2030. The year 2030 was selected as the date when Romania is likely to achieve the EU objectives set for drinking water and urban wastewater treatment;¹¹⁰ however, Romania has requested transition periods of 2020 for these EU requirements. The Strategy reports that 2030 was dictated by the limited possibilities of investment in the sector, but this appears not to have been coordinated with Romania’s team negotiating the Chapter 21 requirements. The longer period set forth in the Strategy suggests that Romania may well need transition periods longer than those requested.

The Strategy estimated that a total of 17.7 billion EUR would be required between 2002 and 2030 to rehabilitate the water and sewerage, urban heating and sanitation services. This figure is divided between the different services as follows:

The following pie-chart shows the Strategy’s structure of fund granting allocated to the various sectors:

The Structure of Fund Granting in Percentage

The strategy estimated that the yearly ratio of this investment would be spread as follows:

The Strategy does not clarify whether these estimates of annual costs are only for investments in infrastructure or whether they also include operating and maintenance costs. If operating and maintenance costs are not included, the burden on Romania’s public sector would be significantly higher.

The MPA’ s Strategy stresses that the already constrained state budget cannot be the primary provider of these investments, and suggests three ways of attracting additional financing: (1) grants from the EU or other countries; (2) involvement of private capital (i.e. public-private partnerships), and (3) loans from international financial institutions (IFIs) or commercial bank credits for financing public services and investments in local infrastructure.

The MPA’s short-term strategy for the period 2002 – 2004 is to obtain the 942.9 MEUR from a variety of sources, as follows:

As this indicates, EU and bilateral grants remain the most important source of financing (almost 50% of the total) for the public sector environmental infrastructure needed by Romania, and predominantly the financing available through the ISPA programme. The table on the next page shows the environmental infrastructure projects for which Romania will receive significant ISPA grants during the first two years of ISPA financing (2000 –2001).

During this initial ISPA period, Romania succeeded in putting enough viable projects forward to receive its full allotment of ISPA financing for environmental infrastructure projects. The first batch of projects put forward were already part of an EBRD effort to extend credit to the larger Romanian municipalities for environmental infrastructure, and considerable work on feasibility studies and financial analysis had already been done. But the ISPA application process is technically demanding and complicated, requiring the completion of full engineering feasibility studies and detailed financial analyses and it was a major additional effort for the MEW to prepare adequate documentation for each project to meet the EU requirements.

The DANCEE programme and other bilateral donors, including the US and Japan, were needed to provide additional technical assistance (TA) at very short notice, to take the existing information through the next stage of preparing the documentation for the ISPA application. Danish consultants helped prepare the paperwork for the projects at Craiova, Constanta, Arad and Piatra Neamt. Denmark also contributed co-financing for the Piatra Neamt facility.

ISPA Grants for Environmental Infrastructure Projects in Romania (2000 – 2001)¹¹¹

As of October 2002, projects sufficient to meet Romania’s ISPA allotment for 2002 had not yet been agreed. Moreover, the process is not yet over even for the projects agreed in 2000-2001. Before the ISPA funds can actually be disbursed, the projects must be tendered and contracted, in accordance with EU public procurement procedures. Romania has not yet succeeded in getting any of its projects through this process, so that disbursement of ISPA funds and actual construction of the infrastructure can begin. These difficulties suggest a need for TA also in this area of project pipeline management.

Though the rules governing ISPA have recently been modified to allow smaller municipalities to be eligible for ISPA funding (from 300,000 to 150,000 inhabitants), it remains difficult for the smaller municipalities to apply for and successfully receive funding. To remedy this, the MPA is in the process of establishing a Small and Medium-sized Town Infrastructure Development Programme (SMTIDP), aimed at assisting 232 communities having populations of between 10 – 50,000, with a particular focus on providing clean drinking water to small communities. SMTIPD will be funded 50% by PHARE grant and from Romanian sources, and 50% from credit from the European Bank for Reconstruction and Development (EBRD) and EIB. The 50% from PHARE and Roma-nian sources will be split 75% PHARE, 25% Romania. The loans from EBRD & EIB will be paid back through increased user charges. SMTIPD is to be a multiannual financing arrangement operating from 2002 to 2010. In 2002, it will have 40 MEUR (15 MEUR from PHARE, 5 MEUR from the Romanian government and 20 MEUR from International Financing Institutions).

One of the SMTIPD eligibility criteria is that the community must work in association with other communities in the same river basin. There will be 60 EUR per person available, so a town with 5000 persons will be eligible for 30,000 EUR under SMTIPD, for new infrastructure or for refurbishment of old structures (e.g. replacement of delivery pipes and refurbishment of pumps). The SMTIPD is a promising financial mechanism to support Romanian municipalities in delivering safe drinking water, and may be a useful model for other infrastructure needs, if additional donor and IFI funding can be secured.

Very small communities are eligible for assistance from the Rural Development Programme. This is a five year programme which started in 2002 and with a total funding of 110 MEUR, largely financed by the World Bank (100 MEUR) and partly financed by Romania (10 MEUR) through in-kind contributions from municipalities.

To help Romania to meet its environmental investment challenge, an Environmental Fund was established in 2001. A Government Decision approved the organisation of the Environmental Fund, including 31 administrative positions. As of October 2002, three staff persons are in place, and over 1.2 MEUR already collected from various fees and charges.¹¹² Projects eligible for Environmental Fund financing will include those aimed at control and reduction of air, water and soil pollution, including the utilisation of clean technologies; natural resources protection; management or recycling of waste; treatment and/or elimination of dangerous waste; protection and conservation of biodiversity; education and awareness regarding the environmental protection. Again, the funding that will be available through this mechanism will be important, but not sufficient.

As section 2 has already described, according to the recent roadmap for Romania, EU resources available will expand significantly between 2004 and 2006, and the extent of such funding will be linked to absorptive capacity. But the significant assistance that Romania has already required to prepare sufficient projects for the first two years of ISPA indicates the difficulty that remains in meeting the technical requirements for qualifying for ISPA funding. Romania is currently ill-prepared to take advantage of this potential increase in funds.

Even if bilateral and other donors are prepared to support the additional technical assistance that may be needed, the capacity of the MEW, MPA and the municipalities themselves to absorb such assistance is still limited. Moreover, the EU Common Position on Chapter 21: Regional Policy and Coordination of Structural Instruments, flags some uncertainty on Romania’s administrative capacity to implement Structural and Cohesion Funds in the future.¹¹³ Romania’s financing challenge therefore includes the need not only to bring in the additional funds from EU, bilateral, international and private sources, but to overcome the current limits on its capacity to absorb such assistance.