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7.9 Financing (Topic i)

In most transition countries, the highest percentage of the environmental expenditures for capital investments and current expenditures as a share of the total expenditures is dedicated to water protection (e.g. in Latvia, Lithuania, Estonia, Moldova, Ukraine, etc.).

The main sources of financing environmental expenditures (including wastewater facilities) in transition countries are the following:

  • the State and municipal budgets,
  • funds of enterprises,
  • extra budgetary funds,
  • foreign loans and grants.

For the financing of the construction or reconstruction of wastewater facilities in most cases the municipal or State budgets alone are insufficient. Therefore, a combination of different sources takes place, often with loans or credits from national and/or international banks and/or with money from extra budgetary funds. In some countries, like Ukraine, environmental expenditures are primarily financed by enterprises. These enterprise funds include also foreign loans and credits, as well as municipal or State allocations.

Most transition countries created a special environmental fund as an instrument to improve funding and the efficiency of environmental payment and expenditures. The environmental funds include, at least to a certain percentage, water pollution and water use charges of the industry and households, fines for wastewater generation, and all the other charges, fines and penalties for environmental pollution (air, waste, etc.). However, in many transition countries this important finance source cannot be used efficiently, because the enforcement of legally existing financing schemes for environmental protection is hampered by the current economic situation. At present, it is not possible to enforce environmental payment in their full legally foreseen form in order to avoid bankruptcy of enterprises. In several transition countries the polluter-pays principle is not introduced in practice as a powerful economic tool, again because of the unstable financial situation of most enterprises. Furthermore, enterprises should be convinced and supported to synergise environmentally friendly and economically sound solutions in order to invest in productivity and improving environmental performance. However, to encourage businesses to take low-cost measures to minimise emissions during the production process, an incentive is needed rather than punishment.

In Croatia, the water management sector has developed a comprehensive system of charges, grants and other economic instruments, like sanctions, penalties and fines. Water protection charges (effluent charges) are only 25% of the average purification price (in contrast to the Law on Water Management financing, which stipulates full cost coverage). This is because of the severe economic difficulties of the country and the substantial war damage. Effluents are subject to permits. Charges have to be paid to Hrvatske Vode, the State water management agency. In 1997, about 85% of the invoiced charges to households were actually paid (only 74% in 1994). Other relevant charges are water use charges (abstraction), which vary between the regions, between water user, type of water use and source of supply. For households these charges are between US$ 0.07-0.10 per m3. Charges for industrial users are 10-30% higher. The charges go to the local government for financing investments for land improvement of all kinds. Furthermore, payments of fines related e.g. to the generation of wastewater and sewage go to the county budget. Payment is usually determined by a court, on submission of the case by environmental inspectors. However, the fines foreseen are too high and in general the court ruling is ignored in order to prevent the closing down of the enterprises.

The Croatian legal system has three major public financing instruments for environmental protection; the state and local budgets, special accounts, and extra budgetary funds.

In practice only two of them are used. They are the state and local budgets, which are the main sources for water management, and the special account of the Croatian Water Management Agency Hrvatske Vode. In addition, funds from environmental charges and fees are also used for environmental expenditures in the water sector. The role of local governments and self-government units is significant, they organise various public services, including wastewater management. Public utilities are managed either by private companies on the basis of concessions, or by public enterprises, which are owned and managed by local governments. Both get financed, among others, by fees charged for public utility services or compensations. Unfortunately, in many cases, municipalities which invested in wastewater do not have enough money to cover the loans to operate and maintain the equipment. So they bypass their empty facilities and discharge untreated. At the same time, new projects are being designed and partly financed by Hrvatske Vode.

Hrvatske Vode has a special account for water management. The revenue was about 190.7 million US$ for 1998, of which 25% came from the State budget, 21% from water use charges, 19% from water basin charges, 19% from water protection charges, and the rest are other. Expenditures for 1998 were about 216.8 million US$, of which 55% went for water projects and investments, 29% for maintenance for existing water infrastructure and 16% for others including salaries. The financial deficits, which cannot be covered by these two sources, are mostly covered by credits and loans from national, foreign and/or international banks. Croatia participates in the Regional Environmental Programme for the Danube River Basin and the Danube Action Plan and benefits furthermore from loans of the World Bank and the European Bank for Reconstruction and Development. These loans are also used for investments in industrial wastewater facilities. The volume of loans is expected to grow significantly in the coming years (EPR, 1999).

In Ukraine, there are the following sources for financing environmental expenditures; the State and municipal budgetary funds, funds of enterprises, and foreign loans and grants.

The state budget finances programmes that target state objectives and include also revenues from polluting the environment.

In 1992, Ukraine established extra budgetary funds which include parts of pollution charges, fines and penalties. These funds were created at national, regional and municipal levels, but they play a minimal role in the total expenditures. The overwhelming part comes from enterprises (Table 7.10).

Table 7.10: Environmental expenditure by environmental sector in Ukraine, 1992-1997 (in million US$, current prices)

  1992 1993 1994 1996 1997

Total expenditure

464.56 524.43 569.04 1316.87 950.06
Capital investment as share of total expenditure (%) 7.5 13.6 11.1 9.6 8.2
Water protection (%) 55.8 57.9 61.3 49.1 53.1
Current expenditure 429.8 453.13 505.98 1'190.07 871.68
Current expenditure as share of total expenditure (%) 92.5 86.4 88.9 90.4 91.8
Water protection (%) 57.4 65.6 71.9 53.6 63.8
Source: EPR Ukraine, 1999.

Since 1993 the investment share dropped from 13.6 to 8.2% in 1997 of the total environment expenditure and further drops are expected. Environmental investments as well as current expenditure are primarily financed by the companies own funds. These companies funds include foreign loans as well as municipal and State budget allocations. It is therefor not very clear from where the money comes and how effective the economic instruments like pollution charges etc are. The contribution of foreign funds to environmental expenditure is also difficult to assess.

Integrating environmentally related economic instruments into economic development policies is very difficult in Ukraine. The macroeconomic situation is characterised by high inflation, budgetary deficits, foreign debt servicing problems, the development of barter trade, and overall policy uncertainty. A further complication is the fact that many institutions give a relatively low priority to environmental protection. Weak institutional capacity building for environmental protection at all levels up to the ministries is another reason. Funds available for environmental policies are extremely scarce. The State or regional budgets are not always able to finance even legally prescribed expenditures, and the competent environmental authorities are not in the position to enforce payment of environmental charges, fines and penalties. Therefore, more attention and analysing efforts have to be devoted to studying the efficiency of economic instruments (EPR, 1999).

In Lithuania, the main sources of finance for environmental expenditure are State budgetary and extra-budgetary funds, funds of enterprises and foreign sources.

Environmental investments from the State budget are channelled through municipal budgets. The State's national and sectorial investment priorities, including the environment, are spelled out in the Public Investment Programme PIP. PIP includes investment programs, which are mostly financed with a mix of grants, loans, and budget allocations. As a good example the wastewater treatment pant in Klapéda might serve. It receives allocations from the State and municipal budgets, grants from Sweden, Finland and the EU PHARE programme. These funds are supplemented with a loan from World Bank. By allocating funds for the environment, the PIP follows the investment priorities of the National Environmental Strategy. Thus, the construction of wastewater treatment facilities remains the highest priority. Furthermore, the obligations deriving from the Helsinki Conference, 1992, on the protection and use of trans-boundary watercourses and international lakes, require the construction or improvement of wastewater treatment facilities in 5 large cities of the country.

Extra-budgetary funds consist of the State Nature Protection Fund, which includes environmental penalties and sanctions and is managed by the ministry of Environment, the municipal environmental protection funds (includes pollution charges) and the Environmental Fund for Investments. The latter uses loans, which are granted by banks according to national regulations and has developed transparent rules on granting loans with the help of USAID. Foreign sources cover 57% of the 1997-1999 environmental investment programme. Before 1996, foreign assistance was primarily project-related. Later, when commercial interest rates became more affordable, loans prevailed. So, 80% of these funds were committed on investments (financed by loans and grants) and 20% on technical assistance (financed by grants only). Wastewater treatment projects were financed by environmental funds and municipal grants, but the largest share was financed by enterprises, especially for projects with improve technological processes (EPR, 1998).


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