Denmark's environmental assistance to Eastern Europe 1991 -1996 

4. Assessment of key issues and problems

4.1. The need for and role of foreign assistance
4.2. Project identification
4.3. Project assessments
4.4. Fields of activity
4.5. Financing and the role of various partners
4.6. Monitoring of on-going projects and documentation of effects and outcomes

4.1. The need for and role of foreign assistance.

The mandate for DESF has been to operate mainly in the area of the Baltic Sea (Poland, the Baltic Republics, and the parts of Russia closest to the Baltic Sea), with a second priority to the parts of the east European region more distant to Denmark.

The geographical focus of DESF activities from 1991-96 has been comprehensive. Unlike other western donors DESF has not developed a partnership with one major recipient, but has - within its mandate - operated in most of the region. A special relationship seems to have developed with Lithuania, which has been one of the largest beneficiaries of DESF grants. In Poland, DESF has been the largest bilateral donor, despite the presence of many donors. In Slovakia, Romania and Ukraine, DESF has become the most significant donor on the background of limited foreign environmental support from the West. Unlike several other donors, DESF has in addition to technical assistance also offered direct support for investments. This dimension of the DESF grant policy is highly appreciated among the recipients.

Considerable declines in air and water pollution emissions have taken place all over Eastern Europe since 1989, reflecting the decline in industrial production. Only in Poland and the Czech Republic have active pollution control policies played a perceptible role. In Estonia and Lithuania policies combined with foreign support have played a role mainly with regard to waste water treatment. In Russia, Ukraine, Slovakia and Romania the reforms towards better environmental protection have been moderate or insignificant, and the declines in various emissions are due to the difficulties of the economic transition process.

Foreign assistance for environmental protection has been offered by many western countries, but it is still the East Europeans who have financed the major part of the environmental costs. Only in the Baltic Republics has the foreign assistance reached a level of 35-50 per cent of the annual environmental investments. In Poland, the Czech Republic and Russia, foreign environmental assistance has not exceeded 5-7 per cent.

The capacity for environmental protection can be regarded as relatively satisfactory only in Poland, where the existence of independent environmental funds, based on the incomes from pollution charges and fines, offers a stable financial framework for continuous investments in pollution control. In the Czech Republic and in Estonia, the environmental funds are weaker and have a smaller turnover. In these three countries, as well as in Lithuania and Romania, there is however an interest in conforming with EU environmental standards, which seems to assure a certain amount of progress.

In Russia, Ukraine and Slovakia, the environmental protection policies have, compared with the ambitions immediately after the changes of the political systems, by and large been dismantled. The political institutions in charge of environmental policies are weak and the financial commitments have been reduced. Particularly in Russia and Ukraine, but also in Romania, the lack of effective environmental policies seems to have serious implications for the health conditions of the populations - not only due to various toxic and non-toxic emissions but also due to the appalling state of water supply systems. In addition energy consumption per unit of GDP remains high and inefficient.

Foreign environmental assistance has a different role to play in the different parts of the region. In Poland and the Czech Republic, the environmental assistance is no longer essential, but it can still make a difference by providing access to advanced equipment and by offering partnership and training to local institutions and persons. In these two countries, it is not the absolute financial contribution which is important, but the qualitative cooperation that can take place in the framework of foreign assistance. In the Baltic Republics, the assistance is a significant component of the countries' environmental investments, and if continued at the present level, could enable these countries to achieve a more reasonable general standard in the basic issues of air pollution, waste water and waste management. In Russia, Ukraine and Romania, the assistance can offer relief in prioritised hot-spots and help solve problems which are urgent and serious, but the resources required imply that foreign assistance can only deal with a limited number of problems.

The gradual extension of DESF activities towards a broader effort in the region is noteworthy, and appropriately reflects the seriousness of the problems particularly in the area of the former Soviet Union.

4.2. Project identification.

A key problem for DESF is the mechanisms whereby projects are identified - and the possible congruence with the priorities of the recipient countries. Both an application procedure and a tender procedure are currently applied.

In the first years of DESF activity, only the application method was applied and as DESF operated with a limited staff (as only limited resources were available for administration) new projects were often developed by different Danish firms and consultants, who on their own identified and proposed partners and projects in Eastern Europe. The choice of the application method may have reflected the broad public involvement in Denmark with the problems of Eastern Europe and the expectation that many different actors were ready to involve themselves in environmental assistance. The application method, as well as the general disorder in Eastern Europe immediately after 1989, seems to be the reason for the relative lack of focus in the project portfolio especially in the first years. The authorities in the recipient countries could only offer rather broad shopping lists of problem areas, but no specific project opportunities.

A basic principle for the bilateral assistance, which DESF can offer, is the development of projects based on the competencies and skills of Danish firms and institutions, which are prepared to involve themselves in such projects. Still, it is not granted that the assistance which can be offered on a bilateral basis always reflects the most urgent needs or priority areas of the recipients. To the extent that Danish firms and companies search for project opportunities, their proposals will often reflect the technologies and types of know-how that they can deliver, and they will not necessarily be able to identify the most relevant or distressed partners in the recipient countries.

It is the opinion of the review team that the first two years of DESF activity, due to the relatively passive use of the application method, became biased towards consultant-driven projects, developed among companies familiar with DESF activities. Several of these projects had few tangible benefits for the recipient countries. This pattern applied mainly in countries close to Denmark, but not in the more difficult NIS-region or in Balkan, where few Danish firms ventured at their own initiative.

The problems seem to have been recognised by the DESF administration, and from about 1993 a laudable effort was done by DESF to develop projects which more closely matched the priorities of the recipient countries. From 1993, DESF also gave priority to investment projects, and in a number of cases it was possible to follow up on initial feasibility studies with implementation projects. From 1993-95, DESF succeeded to initiate annually about 40 investment projects. Many of these investment projects are impressive, they transfer rather advanced environmental technology and they give reason to expect that substantial environmental improvements will be reached. The projects have been identified through many different sources, but generally in closer cooperation with the recipient countries. The Luzern conference in 1993 agreed that National Environmental Action Plans (NEAPs) for each of the East European countries should be developed. Such NEAPs provided donors such as DESF with lists of national priorities that formed a better informed starting point for the identification of projects.

The principal advantage of the application method seems to be that the DESF administration does not have to develop projects on its own, but can review and assess incoming proposals. The method allows DESF to select from a broader range of project opportunities, but calls for proposals and specification of DESF priorities do not seem to have been advertised at regular intervals. It is the impression of the reviewers that the DESF administration has tried to shield itself from consultant-driven projects by not advertising too actively the support policy, and instead has developed cooperation with companies with an acknowledged expertise. The reviewers are not entirely convinced about the principal merits of this approach, but it seems within the narrow limits of the application method to have been a reasonably productive approach.

Since 1996, a tendering procedure has been used in parallel with the application method. The tendering procedure implies that DESF, in active cooperation with the authorities in the recipient countries, identifies the needs for assistance, then elaborates and develops the specific projects to be carried out and finally tenders out the implementation of these projects. It is the opinion of the reviewers, that the introduction of the tendering procedure represents a significant improvement in allowing the recipient countries a more active role in identifying and developing projects. It offers a more transparent process, although in practice there are relatively few Danish companies with the skills and expertise to engage in such large projects.

The first experiences with the tendering procedure indicate that although it apparently has been more succesful in terms of targeting assistance to issues of priority, the development of tenders in close cooperation with the authorities in the recipient countries is a time-consuming process. It can take up to one year from the initial agreement until a tender can be offered. In most cases, professional consultants have been hired to prepare the tenders, although also the DESF personnel and the local project coordinators are involved in the drafting stage. The main difficulty seems to be that the tendering procedure has its own legal logic, which often requires additional expertise. A clear disadvantage of the tendering approach is therefore that it is administratively resource-consuming. It is therefore appropriate that the DESF policy has been to develop tenders for more large-scale projects, often about 8-12 million DKK.

It is the opinion of the review team, that the tendering procedure is especially appropriate for large infrastructural projects related to water and energy. The review team agrees with the DESF administration, that the tender procedure needs to be supplemented with the application model, which offers more flexibility. There still seems to be a role for the application model in particular for smaller projects and for technical assistance projects.

The use of regular and advertised calls for proposals for DESF and a transparent indication of priority areas will be essential to increase the critical mass of projects to choose from. Such procedures would also allow more Danish firms and institutions to take part in DESF activities. Calls for applications could be divided into two phases; a first call for letters of intent and a second invitation to selected applicants to submit detailed proposals.

As regards the tender procedure, the priorities of the recipient countries need to be carefully defined. There is a certain risk, especially in the NIS-region, that the project-identification of the recipient countries is distorted in ways which are not preferable by the local affiliation of particular civil servants. However, projects identified on basis of National Environmental Action Plans, designated hot-spots or other objective criteria represent the result of a more conscious and collective process.

A third alternative to the application and tendering methods is to transfer DESF grants directly to responsible environmental institutions in the recipient countries. Such a transfer would imply an untying of the assistance, a principle which the 1995 Sofia declaration recommended to be mutually adopted among Western donors. It would allow the recipient country to use the assistance more freely in accordance with its national priorities. Presently, the appropriate financial institutions responsible for environmental investments in most of the recipient countries must be regarded too weak for the application of this method - with the exception of Poland.

In Poland, both the National Fund and the EcoFund offer viable frameworks for the direct transfer of assistance - in the latter case the funds will remain partly tied, as the tenders of projects are reserved to firms from the donors of the EcoFund (USA, France, Switzerland, Norway, Sweden)(OECD, 1998). By transferring a lump-sum grant to Poland's EcoFund, DESF could release administrative resources for the assistance to other countries. The review team recommends that this approach be considered for Poland, and as appropriate also for other countries where environmental funds may be allowed to operate independently and accountably.

4.3. Project assessments.

In 1995, a more systematic procedure for the assessment of DESF project proposals (according to the application method) was introduced.

The scoring system gives equal emphasis to general purpose criteria of DESF (0.35) and internal project logic (0.35), while methodology (0.10) and project leader's qualifications (0.20) play a smaller role. The procedure has provided a more systematic project review than in the first years of operation, but could still be improved.

The scoring system does not address some of the essential aspects of DESF financing, such as significance of the environmental problems addressed or the cost-effectiveness of the proposed measures. The assessment methodology does not address the allocation of financial means for hardware equipment versus consulting services, and it does not give credit to projects that include local partners.

While the environmental and technical assessment of the projects generally are of a high quality, there does not seem to be a clear economic project assessment. Project assessments should address the cost-effectiveness of the proposed measures, i.e. the costs per unit of pollution reduction should be indicated and measured against a general yardstick for such costs. DESF could develop more systematic guidelines for reasonable costs, e.g. per unit of CO₂-reductions or per unit of WWTP capacity. The availability of such information would provide a better basis for prioritising among different project opportunities.

In addition, the inclusion of local consulting partners in the projects is generally desirable, both from a cost-effectiveness point of view and a capacity-building perspective. The project assessment could more explicitly address these aspects.

An issue which apparently has often been subject to some dispute between project partners has been the allocation of funds between the Danish project contractors and the recipients of assistance. It was mentioned in several interviews, that the recipients regard the costs of Danish consultants as disproportionate, and that more funds should be allocated for actual environmental hardware.

The per hour tariffs of the Danish consultants reflect the price level in Denmark and have been controlled by DESF according to current regulations. The crucial problem is hence the amount of hours assigned for projects. A more persistent drawback of the application method appears to be its lack of competition on the amount of resources to be spent on consulting services. The application model implies that a Danish contractor proposes a project and indicates the number of man-hours necessary for implementation, but there are few ways in which the DESF administration can really check the appropriateness of these figures.

It is the impression of the reviewers, that the dynamics that follow from the lack of competitive pricing on consultant services help explain the relatively low hardware share of some DESF grants. The shift in 1996 towards a tendering procedure has only partly mitigated this problem, as the application method still accounts for about half of the grant portfolio. A transparent procedure for submission of applications and revised principles for coverage of consulting services seem to be the key to a possible increase of the average hardware share. Not only the per hour salary of Danish consultants need to be considered, but also the overall share of the project grant allocated for their services.

The present hardware share of about 35 per cent implies that in average 65 per cent of DESF grants are used for the services of consultants, mainly of Danish origin. Financial contributions from other sources, mainly of East European origin, secure that in average 80 per cent of the financing for the total project packages are spent on hardware. The reviewers are concerned that this distribution may lead some observers to regard DESF as a commercial instrument, rather than an environmental one. In order to raise its hardware share, DESF should consider to offer the same share of support for consulting as for investments. By lowering the support for consulting services in investment projects, e.g. to 50 per cent, DESF would provide an incentive to all parties to limit these costs as efficiently as other disbursement categories. In this way, it will be possible to raise the overall hardware share to a level that in a better way matches the preferences of the recipients, i.e. 50 per cent or more.

4.4. Fields of activity.

The country review has shown that water supply is a major environmental and health related problem in most of Eastern Europe, and this issue could be addressed more explicitly in the future.

The DESF activities have so far focused mainly on conventional end-of-pipe technologies for waste water treatment, air pollution control and waste management, although an effort has been done also to identify cleaner technology and in particular sustainable energy projects.

While cleaner technology projects must be seen as a desirable contribution to the modernisation of industrial production methods, such projects are complicated by the difficult financial situation faced by firms and enterprises in the transition economies. There is a strong competition for investment funds and interest rates are high in Eastern Europe and many companies are reluctant to involve themselves in environmental projects. They need to be presented as shortcuts to improved economic performance as well. It has also proven difficult to identify firms which, with certainty, are likely to survive the transition period, and industry related projects are generally more risky than conventional end-of-pipe solutions for public authorities.

A particular problem for cleaner technology is created by the absence of true-cost pricing for water and energy services in most of the economies. These circumstances often render cleaner technology projects unprofitable from the point of view of industry. Unless clear win-win situations can be identified, cleaner technology projects are likely to have limited value.

In practice, end-of-pipe technologies are a more likely candidate for projects. Waste water treatment will soon be sufficiently extended in Poland and the Czech Republic, but in the rest of the region there is still a considerable backlog. The previous activities have focused on modernization of older plants, as well as on creating new capacity. Low-cost and simple-technology projects should be considered, as it is expensive for all parties to duplicate present Danish standards. In particular the extension with nitrogen removal should be considered carefully, as this treatment is not cost-effective compared with other paths to nitrogen-reduction, and also hardly relevant in the case of discharges to fresh-waters. Also sustainable energy projects seem to have a considerable potential, i.e. coal-to-gas conversions and geo-thermal energy.

Waste incineration is regarded with scepticism in many countries. Despite several attempts to support construction of waste incinerators, only one or two are under implementation. Modern land fill management and recycling systems are more likely candidates for support.

The previous grant-strategy (for investment projects) has been a demonstration strategy. In principle each project should demonstrate the advantages of applying Western (Danish) technology and know-how, and is expected then to be disseminated to a broader range of interested communities or firms. The demonstration strategy implies that each DESF-project should be a unique project, at least in the country where it is implemented. Projects that duplicate previous projects have generally not been supported, with the exception of waste water treatment plants and where duplication has taken place in a different country.

It is the opinion of the review-team that the demonstration strategy has not sufficiently taken into account the financial limitations on environmental investments in considerable parts of the region. Duplication is often unlikely to take place due to the costs of Western technology and lack of resources for environmental investments - in particular in the least affluent countries. On the other hand, duplication by DESF support could often be an attractive and cost-effective option, once a viable project-package (e.g. for coal-to-gas-conversion, for windmills, for wwtp or for water supply etc.) has been identified. It should of course be avoided to give preference to one specific Danish supplier. By promoting duplication of successful projects, a greater multiplication effect can be achieved, and the administrative difficulties incurred by developing unique projects could be reduced.

There have been few large-scale nature protection activities with DESF support, and many projects have in fact rather related to strengthening of NGOs. The few actual nature protection activities have, however, provided significant benefits, and this field of activity is likely to be given more attention in the future through cooperation with the Danish Agency for Nature and Forestry. Co-financing from other sources has been quite satisfactory for nature protection projects. On the other hand, the NGO-projects carry the risk of subsidizing rather small organizations without sufficient scale and professionalism. A tendency towards many small NGOs is reported to be reinforced by the presence of many donor agencies. Nevertheless, projects implemented by NGOs can often be implemented with less man-hours from the Danish side, and are especially relevant in countries with limited democratic and environmental reforms.

The provision of technical assistance to promote capacity-building is likely to remain a component of DESF activities. Previous efforts to provide advice and support for the environmental ministries have yielded few tangible benefits due to the turnover of staff and the political instability. Activities to be carried out to strengthen environmental ministries and funds should in a better way take into account the difficult conditions for their work. Involvement in legislative activity can not be recommended. The project to strengthen the Russian environmental funds seems to be more promising. Projects to build up modern information systems, with transparent access to publications and documents of the national ministries, as in the Danish system, seem to be a potential opportunity. More training of environmental staff at Danish institutions or educational centres is a further possibility, which could strengthen the ties between Denmark and key individuals in the environmental administrations in Eastern Europe.

4.5. Financing and the role of various partners.

International financing institutions (IFI) such as the World Bank, European Bank of Reconstruction and Development (EBRD), the Nordic Investment Bank (NIB) and others are often accorded a key role in environmental financing in Eastern Europe.

In recent years, it has been a key component of the DESF strategy to provide grants for pilot projects and feasibility studies, which then prepare the ground for subsequent IFI financing. This strategy has been succesful in a number of cases, such as the small municipalities project in Estonia. From 1991-96, DESF was involved in the implementation of 10 different projects with IFI-financing, with a total disbursement of 420 million ECU (3,2 billion DKK). 5 additional projects have been matched and are under preparation; their budgets amount to 362 million ECU (2,8 billion DKK). It is clear that this strategy significantly assures a multiplication of the finances available for environmental investments in Eastern Europe.

The basic strengths of the IFIs relate to their expertise in project preparation and the considerable sums which they can offer, provided that the recipients are prepared to raise loans. The policy of DESF to provide funds for IFI pilot projects is nevertheless important, as the East European countries lack the resources for such preparations, and as they ultimately may raise funds that are far more encompassing than what the bilateral donors can offer.

IFI-projects do not necessarily lead to purchases of Danish environmental equipment, but with Danish involvement in the tender phase, some Danish equipment or consulting will be likely to be included. Unfortunately no data is available on this aspect.

The problem with the banks is that the loans they offer are only provided in relatively large sums, which do not always match the investment needs of environmental projects well. They can then be offered as credit lines for the countries, which need to split them up and manage smaller loans and credits. Still, the IFIs have a rather conservative and conventional policy of lending. From the country review process it was the impression, that the IFIs have only had limited success in environmental financing so far.

DESF policy for cooperation has developed in recent years, and is not well reflected in the financial composition of the 342 finalised projects. The above-mentioned 15 projects serve to make a sum available for environmental protection which exceeds the total DESF budget almost with a factor 5. Cooperation with the IFIs seems promising and should be continued.

With regard to other bilateral donors, cooperation and coordination at project level take place through PPC, the Project Preparation Committee. In addition to the Nordic countries also Switzerland, Austria, Germany, France, UK, Japan, Canada, the USA and the EU have offered bilateral environmental assistance to the countries in Eastern Europe. Each of the donor countries operate according to their own criteria, and the divergence does not always facilitate cooperation. DESF has in 9 cases been able to initiate projects in cooperation with other donors. Coordination is time and resource consuming and is not really an end in itself. It is more important to avoid duplication of efforts.

PPC has so far approved a total of 59 projects with joint donor and IFI involvement. From 1993-1996 Denmark was involved in 19 of these projects, and is one of the most active participants in the PPC process (PPC, 1998). Since 1993 PPC has also matched bilateral donor funding in 58 other projects, but in 1998 all the 58 projects are still under preparation so it is a complicated path to environmental improvements.

A reasonably useful model for donor coordination was developed in the Daugapils project in Latvia, where a component of a larger World Bank project was singled out and implemented in cooperation by Swedish and Danish funding agencies. Apportioning responsibility for particular components reduces the risk that a joint donor and IFI effort get stuck in complex project management.

The role of donors may have been somewhat overestimated as compared to domestic East European sources of finance. The IFI's, on the other hand, can provide finances at a scale which match the actual needs for infra-structural environmental investments in the region. The question is whether the countries in Eastern Europe are prepared to take loans, and to which extent the IFI's have expertise to develop sustainable environmental projects. DESF has acted as an active broker in this process, by facilitating and preparing the ground for IFI-financed investments.

4.6. Monitoring of on-going projects and documentation of effects and outcomes.

The review team has noted with some concern, that DESF does not have written procedures for monitoring and inspection of on-going investment projects. The national country coordinators are expected to follow these projects, but it seems that they do not have sufficiently precise instructions and mainly become involved when difficulties arise. Besides, such coordinators have not been employed in all the programme countries.

It is also necessary to develop firm procedures and methods that will allow for precise ex-ante and ex-post monitoring of pollution emissions, in order to substantiate the environmental effects of DESF projects. Presently, the environmental effects can only be assessed on the basis of information from the project contractors, who have an obvious interest in supplying as positive a picture of their project achievements as possible. As monitoring is costly such methods should be developed mainly for the key investment projects. They may have to include inspection of an independent third-party. DESF also needs to improve its internal database management system to improve the quality control of the registered environmental effects, which should be more critically assessed before being recorded.

A programme to co-ordinate and qualify the activities of the project co-ordinators needs to be developed. Their knowledge of Danish environmental policy and know-how as well as exchange of information among them could be strengthened through annual seminars taking place in Denmark.

Finally, there may be good reasons to provide the country co-ordinators with a stronger backing up in terms of an environmental attaché at some of the Danish embassies. The country co-ordinators employed in the national ministries are often recruited from these ministries and despite their qualities, they do not always have sufficient influence to handle project complications. A stronger presence in the programme countries can be expected to improve the implementation of DESF financed projects. There is also another aspect: environmental assistance makes up the greater part of Denmarks assistance to Eastern Europe and needs to be better co-ordinated with Danish foreign policy. One example is the reluctance in Estonia against projects in cities with Russian speaking citizens. An effort to convince the Estonian authorities of the broader advantages of such projects requires the experience that an environmental attaché could provide. Environmental attachés can also play a key role in the identification of projects. However, it is essential that such attachés have both a proven record in environmental protection and can work as generalists. It is recommended that environmental attachés be considered for the embassies in Warsaw, in Moscow, and for the Baltic states (either in Riga or Vilnius).