Sources: Studies listed in the table.

There is some consistency within recent studies that the total investment needed by Bulgaria to comply with the EU environmental acquis is around Euro 11,000 million. Another key conclusion from the analysis is that the investment needs are spread across the four main sectors, and that they are likely to be approximately equally divided between public and private sectors.

Cost and Affordability

By any standards the making of this level of investment is a major challenge for Bulgaria, with problems at three separate levels:

	Raising the capital for investment
	Repaying the capital (and interest)
	Meeting the related operating and maintenance costs

If the investment needs identified in the World Bank Study were implemented in full by 2015, this would represent an annualised investment cost over 20 years of Euro 942 million, and also generate an ongoing operating and maintenance cost of Euro 749 million. The total is Euro 205 per capita per year, which is broadly in line with the figures for Candidate Countries such as Poland, the Czech Republic and Hungary. However, the GDP of those countries is much higher than that of Bulgaria, where this level of investment represents 6.7 per cent of the projected GDP for 2015 compared to a more usual figure of 1.5 per cent to 2.5 per cent in most other Candidate Countries.

The situation is exacerbated by two further factors. Firstly, the high level of indebtedness of Bulgaria and the controls imposed by the International Monetary Fund reduce the flexibility of the government in identifying funding options and sources. The IMF sets limits on the percentage of GDP that can be used by the state to fund investment projects, and on the amount of government borrowings including sovereign guarantees. Similarly cautious economic policies are likely to continue at least until accession, based on the Currency Board Arrangement CBA that has contributed to Bulgaria’s macroeconomic stability and sustained economic growth since 1998. Secondly, the high level of poverty in Bulgaria, estimated at 36 per cent calls into serious question the ability of the population to meet the higher charges for environmental services that will result. These costs might represent up to 24 per cent of the household budget in urban areas and 18 per cent in rural areas.

This issue of ‘affordability’ is significant. Not only can the Bulgarian state or local authorities not ‘afford’ to borrow the capital needed for investment, users cannot even afford to pay the full economic cost of the services that are provided. Experience elsewhere in the Candidate Countries indicates that these facts will both decrease payment rate and reduce demand. This has led to many plants being oversized, and clearly inhibits any private investors from realising an acceptable return on their investment.

This level of investment is an exceptionally demanding challenge for Bulgaria, representing as it does an annualised cost of 6.7 per cent of GDP. It is not yet clear how this unsustainable level of investment can be realised without placing unacceptable burdens on both state and citizens. There is a need for more work in this area, both to establish what level of investment would be economically and socially as well as environmentally sustainable, and to develop economic instruments and charging structures that will help to address these issues.

The Effects of Transitional Periods

Bulgaria has requested transitional periods for eight directives. Together, they account for an estimated minimum of Euro 6,321 million of investment or 58 per cent of the total investments. The key directive for which a transitional period has not been sought is the Drinking Water Directive, for which investment estimated at Euro 1,463 million will be required.

The most relevant issue here is that none of the dates requested for transitional periods are beyond 2015, which is the date by which the World Bank study assumes that all the necessary investment will have taken place. It follows that the transitional periods, even if granted at for the full period requested, would not materially affect the annualised investment costs identified above.

However, the EU has emphasised the need for more coherent financial planning in general, and for the preparation of comprehensive directive-specific implementation and financing plans for those directives for which transitional periods have been requested. The 2002 Regular Report states that:

"Bulgaria should focus on planning, identification and availability of financial resources…Equally, efforts to continue preparation and development of directive-specific implementation plans, including financing plans, require close attention." (Regular Report 2002)

Sources of Funding for Environmental Investments

In the late 1990s the actual level of expenditure on environmental projects in Bulgaria averaged Euro 114 million. It is recognised that annual expenditure has increased significantly since them, but at that rate of expenditure it would take no less than 72 years to achieve the level of investment identified in the World Bank report. However, the National Development Plan for the period 2000 to 2006 assumes that average investment will increase to Euro 412 million, which would allow the investment to be completed in less than 20 years.

Investments in air, water and waste alone are expected to total Euro 2,010 million over this seven-year period. The breakdown of funding sources for investment in these three sectors may be compared with the total environmental investment in 1997-98. Please see table 6.2. It is clear that this increase in environmental expenditure is an ambitious target. However, there would still be an average shortfall of Euro 153 million per year compared to the level of investment needed to complete investment in these sectors by 2015.

Table 6.2:
Sources of Funding for Environmental Investment in Bulgaria (million Euro)

Source: National Economic Development Plan 2000 – 2006

Within this framework, it is clear that the three main providers of investment funds from within the Bulgarian public sector are:

The National Environmental Protection Fund raises funds primarily from taxes on fuels (77 per cent), from privatisation (18 per cent) and from a share of environmental charges (3 per cent), and allocates no less than 91 per cent of this to environmental investment projects through grants and zero-interest loans. The role of environmental funds in the Candidate Countries remains uncertain in the face of state aid legislation, and the NEPF has recently been merged into the state budget. However, the EC stated in its 2002 Regular Report: "The existing limitations as to the use of the National Environmental Protection Fund … should not hamper public co-financing."

The state budget already provides funding for environmental projects, and this contribution is expected to increase significantly. The MoEW is clearly the main actor here, together with its agencies such as the Regional Environmental Inspectorates, the Executive Environmental Agencies and municipalities. However, other ministries and state agencies also play their own roles in investment management and the provision of finance. These include the Ministry of Agriculture and Forests, the Ministry of Regional Development and Public Works and the Ministry of Energy and Energy Resources.

Municipalities are key stakeholders in the environmental investment process, but have in practice only played a relatively limited role so far. Overall, there are 262 municipalities and 28 planning districts in Bulgaria, and the municipalities in particular have a key role in the planning and implementation of investment in the water and waste sectors. Many have Municipal Environmental Protection Funds linked to individual municipalities and raising funds from a share of environmental charges. However, the budgets are small.

The planned increase in investment will be difficult to achieve in practice, which makes it all the more important to have ready an appropriate, prioritised project pipeline and a clearly-defined financing strategy based at least in part on known, receptive funding agencies. In this context, it is particularly important to reinforce the role played by local authorities beyond project identification.

Training at all levels in the commercial aspects of project preparation, together with technical assistance in the preparation of prioritised regional investment plans will feed into the directive specific implementation plans. This should be implemented not solely through the MOEW but also through other relevant ministries and state agencies particularly the Ministry of Regional Development and Public Works.

It will include work to improve the capacity of experts and private sector consultants in Bulgaria in this field. Most of the ‘local’ training will inevitably need to be carried out by localexperts.

The Role of EU Programmes

European Union programmes already play a significant role in Bulgaria, both in funding investment in environmental projects and in providing related technical assistance. In general there are three different groups of EU funding programmes that can be considered:

	Pre-Accession Programmes, for which Bulgaria will only be eligible up to the point at which it becomes a member of the European Union;
	Post Accession Programmes, for which Bulgaria will only be eligible following the date of accession;
	Sectoral Programmes, for example relating to environment or energy, and for which Bulgaria may be eligible prior to accession (this has to be determined on a case-by-case basis) and will be eligible after accession.

There are three separate pre-accession programmes, Phare, ISPA and SAPARD, which together have an annual budget of around Euro 3,000 million per year. However, the budget available to Bulgaria is to increase substantially. The roadmap for Bulgaria’s accession implies that the budget will increase by 20 per cent in 2004, 30 per cent in 2005 and 40 per cent in 2005 as compared to the average level between 2001 – 2003.

EU funding programmes and particularly ISPA pre-accession and post accession funds will play a key role in Bulgaria’s environmental financing strategy. However, at present it seems that Bulgaria’s capacity to take-up the funds will be more of a barrier than the availability of funds. It is clear that there are both institutional and training issues to be addressed here. As programmes become more decentralised e.g. through EDIS, support will be needed to facilitate the efficient and effective management of pipelines and investment programmes.

The Role of the International Financial Institutions

Many international financial institutions (IFIs) are already active in financing environmental projects in Bulgaria. These include the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (IEB) and various members of the World Bank Group. Most IFIs provide ‘soft’ loans, which are particularly valuable where repayments can be deferred until the plant is operating and generating income through consumer charges.

The European Bank for Reconstruction and Development (EBRD) had invested Euro 394 million in Bulgaria by 31/9/01. The EBRD has a clearly defined strategy of supporting infrastructure projects in Bulgaria, including municipal/ environmental infrastructure, the power/energy sector and energy efficiency. In particular, it expects to be particularly active in the power generation, district heating, water and solid waste sectors. With the exception of district heating these are all areas where major investment will be needed to meet EU requirements, and the EBRD expects to co-fund projects in Bulgaria with the ISPA programme as it has in other Candidate Countries.

At the same point, the European Investment Bank (EIB) had invested Euro 909 million in 19 projects in Bulgaria, including the environment sector. Like the EBRD the EIB is specifically focused on energy and environmental protection, and expects this part of its business in Bulgaria to expand. The EIB also co-finances ISPA projects, and has also co-financed projects with the EBRD.

The World Bank Group has already committed over USD 1,500 million to 27 projects. The World Bank itself has funded a number of infrastructure projects in Bulgaria including a major project on wetlands restoration and pollution reduction. Key projects in Bulgaria include support for water companies restructuring and modernisation.

In many instances the IFIs have benefited from the pilot projects started by bilateral donors. This includes the DANCEE projects in the water and air quality sectors. Often projects are prepared with bilateral donor assistance while the major part of the investment is provided by the IFI.

The IFIs will also play an important role in financing environmental investment projects in Bulgaria, particularly where co-funding is needed to complement grants from EU programmes such as ISPA. IFIs complain of the same problems and barriers to investment that have already been identified. There is a clear need for an ‘honest broker’ to act as a catalyst between IFIs, EU programmes and project proponent, with the objective of ensuring that requirements are harmonised and that they are understood and fulfilled by project developers.

The Role of Bilateral Donors

The main bilateral donors are Japan, the USA and the EU Member States, including Denmark, as well as Switzerland. In environment alone the Danish DANCEE programme has been one of the biggest bilateral programmes.

The main donors are listed in Table 6.3. Although these figures date back to the late 1990s, they still broadly indicate those European countries that are most active in Bulgaria.

Table 6.3 :
Investment in Bulgaria by Bilateral Donors (million US$)

Source: UNECE Environmental Performance Review of Bulgaria, September 2000

When Bulgaria started a fast-track process of complying with the EU environmental legislation in 1999, the DANCEE strategy was revised with the aim of giving a high priority to assisting Bulgaria in meeting the associated legal, administrative and infrastructure requirements. Over the last ten years The Danish Ministry of Environment has supported 45 projects in Bulgaria, with a contribution of DKK 141 million towards a total project cost of DKK 246 million.

Switzerland is focussing on environment, local government, small and medium enterprises, social sector, the Netherlands is focussing on energy, social transformation, regional co-operation, and the British Know-How Fund has priorities on public sector, civil society, financial markets, and social welfare. The Swiss support environmental projects focused on protecting biodiversity, making sustainable use of agricultural and forestry resources, optimising water management, and reducing polluting emissions and their effects. Germany has supported major planning initiatives, including the development of a manual for the assessment and remediation of past contamination.

The Japan International Co-operation Agency has supported a number of major environmental projects in Bulgaria, including the establishment of an Energy Efficiency Centre and a Master Plan Study on Integrated Water Resources Management covering the whole country. The former may be a stepping-stone for further work on the promotion of co-operation on climate change mitigation measures and the implementation of JI.

The US Agency for International Development has been active in Bulgaria since 1990 and has now committed over USD 420 million to the country. Key priority areas include environment and energy, but the environmental focus has primarily been on biodiversity and protected areas and on environmental trade links rather than the heavy investment directives. However, in the energy sector USAID has promoted investment in energy efficiency projects at local level, with a strong focus on commercial issues, proposal preparation and risk reduction.

In practice bilateral donors are likely to act more as facilitators than investors. In relation to climate change, energy efficiency and renewable energy, there will be opportunities for using Joint Implementation not only to implement ‘complete’ projects but also within a broader funding portfolio. Although this is not always in ‘heavy investment’ areas or driven by key directives, it will still help to free other funding sources for these areas.

The Role of the Private Sector

The key role of the private sector in funding environmental investment in Bulgaria, both now and in the future, has already been emphasised. In practice, there are three separate roles to be considered:

	Private sector funding of private sector projects for example, expenditure by industry to achieve compliance with the IPPC Directive;
	Private sector funding of public sector projects for example, a loan by a private bank to a municipality to finance investment in a wastewater treatment plant or landfill site;
	Private sector implementation of a ‘traditional’ public sector project for example, private development and operation of a landfill site;
	Joint public-private implementation of a ‘traditional’ public sector project for example, developing and operating the landfill site as a public-private partnership (PPP) project.

The first and second options are relatively straightforward, and constrained only by market forces, by interest rates and by EU state aid and/or competition law. One other relevant issue is the financial standing of the municipality (linked to its borrowing power) and the collateral that it can offer. For many municipalities there will clearly be issues relating to the balance between their borrowing powers and the projects that they need to invest in. These are not simply environmental projects, but also schools and other essential local services. Even within the environmental sector there can be problems, with for example investment in a new wastewater treatment plant implying that there is no longer any prospect of borrowing to fund a new landfill site – which may be more important from an environmental perspective.

These third and fourth options need to be considered much more carefully, since the approach used can have a profound influence on any grants that might be obtained from EU programmes such as ISPA. There will also be issues surrounding the implementation of PPP projects, of which there is very little experience in Bulgaria – particularly at the local level at which such projects will inevitably arise.

There remains a great deal of uncertainty over the funding regimes that can apply to PPP projects or to ‘public’ infrastructure projects implemented by the private sector. This is a complex area, and one in which clear guidance from the EU particularly relating to the ISPA programme is eagerly awaited. Although the issues identified above cannot be resolved by a third party, there is clearly an opportunity for providing clearer guidance on the mechanisms for implementing projects using PPP. This guidance needs to be disseminated at local level, where further ‘hands on’ support will also be needed.

Overall Financial Challenges

Overall, the key issue is undoubtedly the enormous scale of investment facing Bulgaria as it moves to comply in full with the EU environmental acquis. The total investment is likely to be more than Euro 10,000 million; leading to an annualised cost that represents 6.7 per cent of GDP if the investment takes place over the period to 2015. It is not yet clear how this can be realised without placing an intolerable economic burden on both institutions and citizens. Transitional periods will not impact significantly on this level of expenditure, because no periods beyond 2015 have been requested.

Current plans foresee a major increase in the amount of state funding, but this still accounts for only 15.2 per cent of the total. EU funds will provide 18.1 per cent, although this is likely to increase beyond 2004 and again on Bulgaria’s accession. The private sector is expected to account for well over half of the total, with 61.4 per cent as direct funding and a further 5.3 per cent through private bank loans. In practice, significant levels of co-funding should be obtainable from IFIs in the form of ‘soft loans’, and the possibility of limited funding from bilateral donors cannot be discounted.

Despite these problems, it is clear that the main barriers to investment are not financial but rather relate to project identification, development and preparation for submission to funding agencies. The phrases used to describe these problems are common to a range of different organisations on both sides of the funding ‘fence’.

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