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Strategic Analysis of the Environmental Challenges for Northwest Russia

3. Cross-Sector Challenges

This chapter highlights some of the cross-sector challenges related to public environmental management.

3.1 Legal and Institutional Challenges

Vertical structure

The three existing administrative levels in Russia – the federal, regional and local/municipal – all have legislative, executive and judicial bodies. The individual regions have extensive autonomy from the federal level, and the institutional set-up of the authorities at subfederal levels varies from region to region. In May 2000, seven Federal Districts were established to ensure that federal legislation is implemented throughout the country⁶, each headed by a socalled "empowered representative" of the president.

Each region is divided into a number of municipalities. The municipal level is responsible for a number of public services to the citizens, such as water supply, wastewater collection and treatment, district heating and waste collection.

Horizontal structure

The Ministry of Natural Resources is the main institution in the Russian Federation responsible for setting the overall priorities and administrative framework for the management of natural resources and environmental protection. It implements the state environmental policy of the Russian Federation⁷ and co-ordinates activities related to environmental protection. However, the Ministry of Natural Resources is far from the only ministry responsible for environmental protection. Although MNR has a responsibility to supervise the implementation of the environmental policy, it has no real power to control and co-ordinate environmental activities of other ministries and committees.

An important factor preventing the Russian public administration from functioning in an efficient manner is lack of co-ordination and knowledge exchange between the various institutions.

The picture gets even more complicated when taking into consideration that most governmental institutions have a "vertical" hierarchy of offices from the federal down to the lower administrative levels⁹. The newly established level of federal districts does not yet cover the full spectrum of establishments corresponding to the federal ministries and other executive power bodies, even though most of them are present within the lower administrative levels.

Each Federal District has an interregional department for natural resources located in the central city of the District. The Northwest Federal District is placed in St. Petersburg. Departments for Natural Resources likewise represent the Ministry of Natural Resources at oblast level and at local level by a corresponding department or just a staff member in charge.

The "Dual" Role of the Ministry of Natural Resources

As the Ministry and its regional and local network is overall responsible for both the exploitation of natural resources and environmental protection, these often conflicting interests demand strong co-ordination within the ministry. At the same time, this setup should facilitate a proper integration of environmental concerns when planning and executing the exploitation of the country’s abundant natural resources, though this opportunity does not yet seem to be fully utilised.

3.1.2 Legal framework

In 1991, the Law on Environmental Protection was signed. This was the first comprehensive environmental law of the Russian Federation. It was based on some of the principles of international environmental law contained in the Rio Declaration, i.e. "polluter pay" principle, public participation and access to environmental information.

Since 1991, a systematic revision of environmental legislation has taken place and new laws have progressively replaced those of the USSR. During 1991 and 2000 more than 30 new environment-related laws were adopted in Russia.

Despite the significant progress in developing environmental legislation, the environmental regulatory framework is still complex and sometimes inconsistent. The Regions may adopt their own legislation in areas of shared competence and in areas unregulated by federal legislation, e.g. regional norms and standards. Local administration may also lay down regulations in addition to or elaborating on federal and regional requirements.

Thus, the environmental regulatory framework leaves considerable room for regional and local environmental administrations to make discretionary decisions. As a result the present multilevel administrative system is complicated and incoherent, and it has numerous and not always compatible norms and standards and diverging permitted practices¹⁰.

Lacking "Rule of Law" Legislative Tradition

Traditionally Russia has not been a society based on "rule of law" principles. Rather, the governing of the country has been based on the administrative apparatus. During the past decade, a number of steps towards rule of law have been taken and a number of key pieces of legislation have been drafted and passed. However, there are still gaps and overlaps in regulation. Some areas are not regulated properly and other areas are subject to several provisions thus creating confusion concerning the actual legislation in force – i.e. confusion between old (Soviet) regulation and new regulation.

Changing the system towards "rule of law" is difficult due to resistance in the administrations. Individuals in the administrations have built up power bases, which secure influence and eventually economic gains. The World Bank report "Transition – the first ten years" points to the fact that these gains can be extraordinarily high in the context of a partly liberalised economy, and especially in economies rich in natural resources which is the case for Russia.

Source: World Bank, Transition – the first ten years, 2002

Administrative reforms would jeopardise these positions and consequently the reformers have to overcome shortterm losses for individuals in order to create longterm benefits for the society.

Standards

The present environmental effluent standards in Russia have been established during the Soviet period and are based on the "zero risk concept" i.e. maximum allowable concentrations of pollutants in effluents (e.g. air emission, wastewater discharge, waste disposal). On paper, the standards and norms established are very strict. However, since most industries and public utilities are unable to operate at those high environmental standards, so-called "temporary agreed standards" are usually negotiated. As such, the implementation of environmental laws and standards are based more on exemptions than enforcement.

3.1.3 Monitoring and enforcement

Even if normative standards were upheld, enforcement capabilities seem to be quite weak, both with regard to technical¹¹ as well as institutional capacity. Lack of capacity has lead to infrequent inspections and on-site controls. Inadequate and infrequent monitoring and inspection practices do not create incentives for compliance and for improving technological and environmental performance.

Source: Department of Natural Recourses and Environmental Protection of Kaliningrad Oblast

When it comes to standards for efficient use of natural resource, the Russian system is less restrictive. Whereas Soviet standards and norms on energy efficiency in the heat and power generation reflected state-of-the-art in 1960s and 1970s, they fall short when compared to today’s requirements in the European Union.

Source: Article by WWF Russia

3.2 Financing of Environmental Services and Investments

3.2.1 Challenges and problems related to financing

A major barrier to compliance with international conventions and targets for environmental improvements is to secure financing. Environmental targets in Russia have often been defined without regard to the related costs.

This issue of financing is in particular relevant to the provision of public services, i.e. supply of energy and water, treatment of wastewater and collection and handling of waste. These sectors suffer from out-dated and worn-out infrastructure, which has been left in disrepair for decades.

3.2.2 Financing need

No overall assessment has been made of the total financing need for bringing environmental services in Northwest Russia up to an acceptable standard.

The Russian National Environmental Action Plan (1999) does not contain costing estimates and contains no specific action plan covering Northwest Russia. Following the NEAP, some regions developed sector-oriented plans partly based on the National Environmental Action Plan, but they rarely encompassed the costing of planned interventions.

The total costs of bringing all 132 HELCOM hot spots up to environmentally acceptable standards were estimated by HELCOM in 1999 at about Euro 18 billion for all countries involved. According to the costing exercise, the financial requirements related to the hot spots in Russia within water supply and wastewater treatment was estimated to be Euro 1,400 Million and Euro 14 Million for hazardous waste management¹².

Today, the 1999 estimate of financial requirements for hazardous waste management seem too low as the reprocessing plant planned for the Krasny Bor hazardous waste landfill site alone represents an investment cost of app. Euro 45 million¹³.

In addition to the identified hot spots, there are a number of similar challenges throughout Northwest Russia, which likewise require huge investments.

3.2.3 The Financing Gap Related to Environmental Services

For many HELCOM hot spots, financing packages with participation from Russian sources, international financing institutes and bilateral donors have been identified.

However, the general picture is that significant underfunding marks the municipal services sector and the problems are worsening year-by-year. At present, many utilities have problems covering even their operational expenses within the present levels of revenue they can generate.

During the last two-three years, a number of environmental financing analysis – and subsequent strategy formulations – in selected regions in Northwest Russia have been carried out in the water and waste sectors with support from OECD and the Danish Environmental Protection Agency. The results from these initiatives serve to illustrate the significant amount of funding needed throughout Northwest Russia for environmental services. The strategies for Pskov, Novgorod, and Kaliningrad all concluded that there was a major gap between expenditure need for public utilities and available finance – even when aiming for a continuation of the existing moderate service level. Hence, the financing requirements related to a more ambitious service level – e.g. improved wastewater treatment – would lead to an even larger financing gap because of the required investments and subsequent needs for maintenance and operation.

3.2.4 Main Causes of the Financing Gap

There are four main explanatory factors for the serious lack of financing in the municipal environmental services. These are discussed below.

Low revenue from user charges

Traditionally municipal services have been provided to users at a very low cost intended to cover the operation of utilities, whereas financing for main repairs and investment in new equipment for utilities were to be provided by the public budget.

Lack of public funding

The Ecological Fund was established in the early 1990s and comprised the collection of revenues from pollution charges to be channelled

With respect to the public budget, ambitious federal target programmes were drawn up during the 1990s. However, these programmes have received only a fraction of the planned funds from the annual public budget due to the general economic decline in the country.

Earlier, the Ecological Fund of the Russian Federation was a source of into environmental financing for environmental projects. However, this Federal fund was activities. abolished in 2000 and consequently the regional and local environmental funds were consolidated with corresponding budgets. The revenue from pollution charges now goes directly to the public budget.

The loss of the centrally administrated Ecological Fund may have a negative impact on investment related to environmental problems of cross regional and/or cross boundary nature as these now have to be funded by regional and local budgets, which traditionally have a geographically more narrow focus.

There is a general lack of strategic sector-level planning. Programmes and action plans are often overambitious in terms of targets to be achieved and do not consider the financing constraints. This means that the few resources available for investments may not be used in the most effective way. Furthermore, new investments in public utilities and the subsequent need for finances for maintenance and operation drains the funds available for maintenance and operation of existing utilities.

Also, complicated ownership structures lack of clear divisions between utilities and municipal administrations and diversified responsibilities for investment actions form an important barrier to sound investment prac-tises.

Resource-intensive services and low maintenance levels

Resource intensity brings up the operating costs associated with the provision of services, and therefore has a negative impact on the financial situation of the utilities. Resource intensity stems both from the inefficiency of the utilities and overconsumption by the endusers.

Compared to levels in western countries, the utilities in Russia are not efficient in terms of energy and staff, which brings up the supply costs of each unit of e.g. water or energy. One main reason for this is that the infrastructure is so worn out that overly high operational costs are required to keep the utilities running. In both the water and the energy sector, there are high losses in the distribution system as a result of badly maintained supply systems.

In general, public utilities in Russia do not organise awareness raising campaigns focused on water or energy savings. Moreover, they may not be interested in such savings for economic reasons. Water consumption dropped significantly in the 1990s due to the economic decline. Many water utilities use only part of their capacity and have no incentive to decrease their production further.

However, the environmental consciousness among the population is slowly improving due to the efforts of state institutions, international organisations and NGOs (local and international) e.g. in the form of campaigns and distribution of information on rational use of natural resources.

Some elements of environmental education have also been introduced in all primary and secondary school programs as well as in all curricula of higher educational institutions.

3.2.5 The Reform Programme for Upgrading the Housing and Utility Sector in the Russian Federation during 2002-2010

The Government of Russia has over the past decade pursued a reform of the housing and municipal services sector. Lately, the reform process has taken an important step forward with the most comprehensive document spelling out the aims of the reform.

In response to the present financing gaps, the Programme for Restructuring and Modernisation of the Housing Sector was approved as part of the Federal Targeted Programme on housing by Government Resolution #797 in November 2001. It includes a wideranging, comprehensive package of development measures to improve the services provided and financial health of the municipal utility sector.

The specific budgets of each region are to be developed during the first stage of the programme i.e. 2002-2003. However, the investment pro-gramme is mainly to be based on regional and local funding, which are expected to cover 98 per cent of the financial needs (to be secured though increased user payments, improved cost efficiency and private investments). Federal funds are only expected to cover around one per cent of the estimated investment costs. International loans are likewise expected to cover one per cent whereas foreign grants are expected to cover some 0.16 per cent of the estimated costs.

With regard to the subsidy scheme, around 86 per cent of the budget are expected to be covered from regional and local funds whereas the remaining is expected covered by federal funds.

3.3 Increased momentum of the reform process

3.3.1 Institutional and legal reforms

To meet its environmental targets – as also demonstrated through Russia’s participation in a number of international environmental agreements – the process of reforming Russia’s legal and administrative framework must be further strengthened based on environmental and financial sustainable principles.

In order for Russia to pursue the overall environmental objectives it is important that the new National Environmental Action Plan for the period 2003-2005 is finalised in a manner that truly facilitates the achievement of the environmental goals outlined in the Environmental Doctrine of 2002.

In addition to the Programme for Restructuring and Modernisation of the Housing Sector, a new water law is also under preparation drawing on EU experiences and lessons and moving toward harmonisation with EU standards in particular the EU Water Framework Directive.

In the administrative system of Northwest Russia the co-operation between Housing and Municipal Services Companies, the Regional Committee of Natural Resources and the Regional Sanitary-Epidemiolog-ical Service must be further enhanced to secure a uniform and more effective approach toward regulating activities within the water, waste and energy sectors. Consequently, a strengthened co-operation is needed also at the federal level between the State Committee for Construction and Housing, the Ministry of Natural Resources and the Ministry of Health Protection.

This demand for a thorough analysis of shortcomings of the whole environmental administration (national, oblast, local level) to secure a proper distribution of tasks and responsibilities, which should be fol-lowedup by a capacity-building programme (targeted at human resources, IT, internal procedures, and co-ordination between ministries). Furthermore, the efficiency and willingness to continue the reform process within the public administration from the federal to lowest local levels must be secured.

3.3.2 Closing the Financing Gaps

Dealing with the underlying causes for the poor financial position of the public utilities is a key to improve financing in the municipal services sector. The main causes for the identified financing gaps in the waste, water and energy sectors can be summarised as:

1. Low revenue from user charges that do not reflect the cost of providing the service
2. Low level of public funding
3. Inefficient use of investment resources; lack of proper investment planning
4. The provision of services is resource-intensive; little focus on efficient utilisation of inputs in particular water and energy

The financing strategies carried out for several regions in Northwest Russia point to several policy options, which may be pursued in order to close the financing gap. Most importantly, closing the gaps requires realistic approaches to what can be achieved within a given financing framework. Therefore, the environmental targets and the cost of achieving these targets must be carefully considered in the light of the scarce supply of finance.

Source: OECD, Danish Environmental Protection Agency: "Short Justification for the Municipal Water and Wastewater Financing Strategy, Pskov", 2001.

Due to the socio-economic situation only gradual increase of tariff levels and collection effectiveness can be materialised. Today, such measures are based on initiatives and political courage of the local Dumas and its materialisation may not be likely (as the Duma’s risk hampering their reelection possibilities). Increased tariffs will lead to higher service expectation. Finally, if a significant part of the consumers have installed e.g. gas and water meters, this will allow them to pay only for their own consumption and not losses of municipal utilities due to e.g. leakage.

It is crucial for the environmental benefits of the Reform Programme for Re-structuring and Modernisation of the Housing Sector that the above issues are properly addressed during its implementation.

Areas of particular relevance for international co-operation

The most important instruments for international support to environmental financing in Northwest Russia include the Joint Comprehensive Environmental Action Programme and the Northern Dimension. However, donor and international financing institutions can not close financial gaps but contribute to more targeted, structured and effective efforts.

Looking for alternative financial solutions experience from EU countries should be considered in particular financing mechanisms from revenues from property tax (charges on land). E.g. costs of solid waste removal and further utilisation are financed through such mechanism in Denmark. However this method of financing requests that a significant part of collected charges on land and properties actually be spent for sector financing of municipal waste management.

3.3.3 Environmental Awareness – resource consciousness

One of the underlying causes for the problems in the water, waste and energy sectors in Northwest Russia is lack of common understanding –both among the civil society and the public administration – on the true economical value of natural resources like energy and water. One explanation is that Russia did not go through the energy crisis in the early 70ties as most of the western countries did, and – as a consequence – had to reform public sector services to reflect their improved costs. In fact, the low energy prices in Russia may have had the opposite effect.

As an integral part of the western countries’ reform of the public services, intensive awareness campaigns were initiated and are still being implemented, as mentalities cannot be changed in the short run. Similar efforts must be initiated in Northwest Russia to increase the public awareness to e.g. understand "affordability" rather than base behaviour on "wants".

Furthermore, there is a huge need in Northwest Russia to increase the quality and accessibility of environmental information. The Environmental Committees should strengthen ties with the NGO community.

Areas of particular relevance for international co-operation

Although Russia maintains a position as observer of the Aarhus Convention, the State of the Environment Report compiled by the Ministry of Natural Resources, clearly states the need for Russia to join the Convention.

Signing, ratifying and implementation of the Aarhus Convention is deemed needed in order to secure Russian citizens’ access to information, public participation and access to justice in environmental matters and strengthened international co-operation would facilitate this process.