Communication from the Commission the Challenge of Environmental Financing in the Candidate countries
Date: 2001-06-08
Institutions: European Commission
Subjects: Central and Eastern Europe, approximation of laws, enlargement of the Union, environmental protection, financing method, investment project, national implementing measure

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 8.6.2001
COM(2001) 304 final

COMMUNICATION FROM THE COMMISSION

THE CHALLENGE OF ENVIRONMENTAL FINANCING IN THE CANDIDATE
COUNTRIES

TABLE OF CONTENTS

EXECUTIVE SUMMARY .................................................................................................... 3

Introduction ........................................................................................................................... 4

1.

The Investment Challenge for Environmental Infrastructure..................................... 6

Key ‘Investment-Heavy’ Directives ....................................................................................... 6

Environmental Infrastructure.................................................................................................. 6

The Investment Challenge...................................................................................................... 7

2.

Setting Priorities....................................................................................................... 7

Prioritisation at the Strategic Level......................................................................................... 7

Prioritisation at the Project level............................................................................................. 8

National and trans-boundary pressures for environmental investment priorities.................... 10

3.

Developing an Environmental Investment Programme............................................ 11

The Role of an Environmental Investment Programme......................................................... 11

Strategic Investment Planning .............................................................................................. 11

Where to begin..................................................................................................................... 11

4.

The Challenge of Identifying and Securing Finance................................................ 13

Income and Affordability ..................................................................................................... 13

Involving the Private Sector ................................................................................................. 14

The Role of Grant Funding................................................................................................... 15

Project funding strategies ..................................................................................................... 15

Capacity building ................................................................................................................. 16

5.

Conclusion ............................................................................................................. 16

ANNEX 1
The Investment Implications of the Key “Investment Heavy Directives”….…………...…... 18

ANNEX 2
Estimated Environmental Financing Needs in Candidate Countries ………………….……. 21

ANNEX 3
Directive Specific Implementation and Financing Plans……………….………………...…. 22

2

EXECUTIVE SUMMARY

for

the acquis

the
The Commission's 1998 Communication on Accession Strategies
Environment1 called on Candidate Countries to develop investment strategies for the
implementation of
legislative
communautaire,
approximation strategies. Such investment strategies are requested by the Commission
and Council as an integral part of the implementation plans required to support the
requests for transition periods. Investment strategies are also essential tools for the
countries themselves to clearly show governments the scale and timing of the
expenditure needed for accession in terms of administration, staff, monitoring
equipment as well as infrastructure. Such strategies are equally important for the post-
accession period,
future applications for Structural/Cohesion Fund
assistance.

along with their

to support

Developing such accession investment strategies is a major task for the Candidate
Countries. It is clear that in some countries the necessary information on compliance
gaps is still not available, and prioritising investment needs for specific directives is
therefore a problem.

Compliance cost estimates presented in 1998 have been further refined in 2000, and
although they now fall within a smaller
range than before, operational and
maintenance costs are higher than predicted. The new acquis adopted in 2000 and
expected in 2001 will add to the investment needs. It is therefore more important than
ever to use available funds effectively, and to ensure that grant assistance leverages
finance from all other sources, whether private, public or commercial.

The Priority Environmental Programme for Accession (PEPA) has been designed by
the Commission to assist countries to develop prioritised environmental investment
strategies. Guidance documents have been prepared including a format for a directive
specific implementation plan and a checklist of the investment-heavy directives. A
database of environmental projects in the Candidate Countries is also being
developed, to help them identify and prepare priority projects for the medium and
long term.

This Communication sets out the strategic objectives for such investment plans. It
revisits the investment challenge in the Candidate Countries,
looks at ways of
enhancing and leveraging available finance, and gives guidance on how to develop an
investment programme for accession.
It describes how Community technical
assistance will now focus on gaps, such as air pollution projects and directives
involving private sector expenditure, and work closely with Candidate Countries on
their directive specific financing plans for problem areas in waste and air pollution
and training for local authorities. In preparing this paper,
the Commission has
consulted both Candidate Countries and Member State authorities (including the
Environment Policy Review Group and the ISPA Management Committee). As part
of this process the data contained in this paper has been checked and corrected by the
Candidate Countries.

1

COM(1998)294.

3

The final aim of this Communication is to assist Candidate Countries to define clear
and credible financing plans for their accession needs, including identification of
possible sources of finance and revenue generation for the necessary environmental
investments.

INTRODUCTION

Approximation of the EU environmental requirements poses a major challenge to the
countries now preparing for accession to the European Union.2 Agenda 20003 and the
Commission’s subsequent Communication on Accession Strategies for Environment4
recognised that the gap in environmental protection in Central and Eastern Europe,
compared with the Member States, makes the task of preparing for accession in the
environment sector different from that of previous accessions. Initial estimates of the
cost of all investments needed to comply with the EU environmental requirements for
drinking water supply, wastewater management, large combustion plants, and waste
management were around 120 billion
for the ten countries of Central and Eastern
Europe alone.

€

The Commission therefore has stressed the need for realistic national, long-term
strategies for implementation of the acquis and has encouraged countries to mobilise
significant domestic and foreign financial resources - especially private funding - to
ensure compliance. Agenda 2000 proposed further that the Union would allocate
substantial Community financial assistance for environmental
in
Candidate Countries, particularly through the new Instrument for Structural Policies
for Pre-Accession (ISPA) as well as the revised Phare programme and the new pre-
accession instrument for agriculture and rural development (SAPARD). ISPA, which
started operation in 2000, will grant over 500 Mio
per year for environmental
investments over the period 2000-06.

investments

€

Nevertheless, EU support and other external assistance will only meet a small
proportion of total needs. Ministries of Environment in the Candidate Countries are
usually responsible for preparing the implementation plans that are then presented by
the governments of their respective countries. However, in many Candidate Countries,
Ministries of Environment have traditionally not been responsible for identifying
compliance gaps and preparing such detailed investment plans. This has added to the
difficulties Candidate Countries
realistic
implementation strategies. Expenditure on environmental protection has increased in
most Candidate Countries in recent years or is planned to increase. However, this
expenditure for most countries is still only a fraction of the needed investments.
Commission services have estimated that Candidate Countries need to spend on
average between 2 and 3% of GDP in the coming years for full implementation. For
several countries this does not present major problems, especially given the high
growth rates beginning to emerge. But investment needs differ considerably between
countries: a recent study estimates that the proportion of GDP needed ranges between

preparing

concrete

face

and

in

2

3

4

Cyprus and Malta applied for EU membership in 1990. Hungary and Poland submitted their applications
followed shortly by Czech Republic, Romania, Slovakia, Lithuania, Latvia, Estonia, and
in 1994,
Bulgaria in 1995, and Slovenia in 1996. In 1999, Turkey’s application was also formally accepted.
COM (1997) 2000.
COM (1998) 294 final.

4

2% for the Czech Republic and 11% for Bulgaria5. Currently, GDP investment
expenditure ranges from 0.6 to 3%. Sources of funding include loans from the
international financial institutions, bilateral grants and credit schemes, commercial
bank loans, foreign direct investment, and revenue generated from consumer charges,
fees or taxes.

Post-accession periods of transition will be necessary for the heavy-investment
directives. However, the transition requests have to be supported by implementation
programmes, which need to include intermediate targets and milestones which can be
monitored after the date of accession.

To date, several Candidate Countries have prepared the financing plans necessary for
the accession negotiations. Moreover, sectoral plans, together with their National
Programmes for the Adoption of the Acquis, form the blueprints for countries’ pre-
accession efforts. In addition, Candidate Countries benefiting from ISPA have
prepared national ISPA strategies for infrastructure in the environment and transport
sectors. These strategies often represent a first step towards implementation planning
for the environmental acquis.

Despite this, considerable gaps remain in the Candidate Countries’ programmes for
implementation. The process of identifying, preparing, financing and implementing
the many environmental investment projects needed for EU membership is going
slowly.
the establishment of new institutions and administrative
systems to carry out the measures necessary for achieving compliance with the
environmental acquis is also lagging. Therefore, Candidate Countries need to
intensify efforts to produce detailed and realistic alignment and investment schedules.

Furthermore,

technical

assistance

The Commission’s
to help with the development of
implementation and environmental financing strategies includes the so-called ‘PEPA’
programme: ‘Priority Environmental Programme for Accession’. Launched in 1999,
the main role of the programme is to support the development of implementation
plans for the investment-heavy directives and ensure that countries have a prioritised
list of projects to be implemented over the next few years. The directives concerned
are listed in table 1 below. The first year of the PEPA programme focused on
investment planning, and in subsequent years the focus will move towards the
development of long-term priority project
lists. These overall objectives were
endorsed by Candidate Country environment ministers at their informal meeting with
Commissioner Wallström in November 1999.

This paper reviews the progress in developing financing strategies for environmental
investments and suggests several key steps to be taken by countries and the
Commission to accelerate this work. Section 1 summarises the results of ongoing
work to identify and assess the gaps in compliance of environmental infrastructure,
including the investment needs. Section 2 addresses priority setting in the
development of investment programmes at the strategic and project levels, including
examples from Candidate Countries. Section 3 presents an outline structure of an
environmental investment programme. Section 4 looks at financing and affordability
issues, while Section 5 suggests conclusions and next steps.

5

‘Bulgaria: the Challenges of Complying with EU Environmental Directives’, World Bank, October
2000, p 8.

5

1.

THE INVESTMENT CHALLENGE FOR ENVIRONMENTAL INFRASTRUCTURE

Key ‘Investment-Heavy’ Directives

Certain environment directives will be particularly difficult to implement, given the
current status of infrastructure in the Candidate Countries and the financial resources
available. In addition, experience in the Member States in implementing these
the challenge. These
directives provides additional evidence of
“investment-heavy” directives are listed in Table 1. These are not the only directives
for which investment will be needed, but they are those which pose the greatest
problems in terms of the number of projects needed and the scale of the investment.

the scope of

Table 1: Key ‘Investment-Heavy’ Directives

Water Supply/Wastewater Treatment

Waste Management

Urban Wastewater Treatment Directive
Drinking Water Directive
Dangerous Substances into Water Directives
Nitrates Directive

Landfill Directive
Municipal Waste Incineration Directives
Hazardous Waste Incineration Directive
Packaging Waste Directive

Air Pollution Control

Industrial Pollution Control

Large Combustion Plants Directive
Fuel Quality Directives
Air Quality Directives

IPPC Directive
VOC Solvents Directive

Annex 1 presents in more detail the main investment
directives and the types of likely investors.

implications of the above

Environmental Infrastructure

the current

The first step in the development of an investment programme should be an
situation and gaps. More data on environmental
assessment of
infrastructure in Candidate Countries is now available, although the picture is far from
complete. Table 2 presents a summary of existing environmental infrastructure in the
Candidate Countries and, where information is available, the current compliance
status of this infrastructure with the relevant directives listed above. This inventory
gives an idea about the compliance gap related to the existing infrastructure, such as
IPPC installations, landfill and water supply connections, that will need to be put in
place in the coming years. The wide range of problems between different countries is
noticeable; where there are one hundred and forty-one IPPC installations in Estonia,
there are four thousand in Poland. There are five landfills in Cyprus, but over a
thousand non-compliant waste dumps in Romania. Percentages of wastewater treated
to 77 percent: some countries which are advanced in
range from 30 per cent
transposition and general planning show surprisingly low levels of investment here.
There are large gaps still between towns and rural areas in sewage and drinking water
facilities.

6

The Investment Challenge

€

€

€

- 110 billion

The data on the financial challenge that the countries face for the implementation of
these directives was refined in 2000 by several studies. Annex 2 presents estimates of
the financing needs for compliance with the environmental acquis. Overall, the results
show that the estimates of 1997 still remain valid. The widely cited figure of 120
billion
for total compliance with the environmental acquis published in 1997 was
estimated using a number of techniques, but basically built on unit costs and per
capita expected costs of infrastructure per sector. Subsequent assessments, which have
focused mainly on the costs of specific directives, indicate lower values of between 80
billion
. Unit costs are lower than predicted, while substantial
investment in some Candidate Countries since 1997 has reduced the estimated gaps.
On the other hand, the figure does not
include the investment needs for some
important new and forthcoming legislation such as the Water Framework Directive
and the planned revisions to the Large Combustion Plant Directive. Furthermore,
some of the estimates to date have excluded operation and maintenance costs. Private
sector investment has not always been included. This is now changing, with an
increasing number of studies looking at operation and maintenance costs and cost-
recovery. Only thus is it possible to assess the sustainability of financing investments,
especially given the crucial role of households and consumers in financing operation
and maintenance. Many of the estimates for specific directives are therefore being
again upgraded accordingly.

2.

SETTING PRIORITIES

Prioritisation at the Strategic Level

The issue of prioritisation is crucial
to the development of an environmental
investment programme. Although in the short term it makes sense to present for grant
funding projects which are the most ready and financially viable, in the medium to
long term the Candidate Countries need to prioritise their
investment needs
systematically. This need will extend far beyond accession.

local

Setting priorities is a complex process that incorporates a wide range of impacts at
regional/transnational, national or
levels. Prioritised investment plans are
currently needed to support requests for transition periods and to help raise awareness
within governments of the investment needs of the accession process. For example, in
May 2000 the Czech Ministry of Environment presented to the government a ‘Cost of
Implementation’ plan which included staffing and administrative needs, to complete
compliance with all the directives. This document was based on the Handbook on
Implementation, published by the Commission in April 2000. It convinced the
government to respond with a substantial proportion of the sums requested. A similar
exercise could usefully be carried out by all Candidate Countries, to ensure that they
have the necessary staff and resources needed to administer and enforce the new laws.

Developing priorities is not only a task for accession. Plans developed now will help
make the most of post-accession Community Structural and Cohesion Funds. The
Commission's second report on Cohesion (COM(2001)24) indicates that support for
environmental investments through the Community's structural instruments will be an
important priority for the new Member States. Furthermore, the implementation plans

7

presented by Candidate Countries to justify transition requests will be monitored after
accession. For all these reasons, a prioritisation strategy is needed in order that
investments can have the maximum possible impact.

Prioritisation is needed at several stages of the investment strategy. Firstly, countries
need to prioritise between sectors, and secondly to choose within a sector. For
example, Lithuania chose to focus on water and waste for its financing strategy6 but,
in order to turn the strategy into reality, hard choices will need to be made for priority
investments within those sectors.

Like Lithuania, Latvia opted for prioritising water and waste, with its broadly based
programmes for municipalities. The waste programme is operational, but lacked a
framework of overall waste management. The Latvian government is now developing
a waste management
strategy to help select and co-ordinate the individual
investments.

For a number of directives, investments will be the responsibility of the private sector
(e.g. Air Quality Framework): here government planning and prioritisation will need
to focus on ensuring that appropriate monitoring and enforcement mechanisms are in
place to stimulate the required investments. The regulatory structure needed to
encourage investment should be in place too. A good example of this is Slovakia,
where the development of a sound regulatory structure for handling solid waste
encouraged private sector landfills to develop rapidly, and where the solid waste
management system is now entirely privatised.

Prioritisation at the Project level

An initial ‘top down’ investment assessment may result from an analysis of areas
where compliance is missing – the gap analysis. However, project definition will most
likely come ‘from below’,
from the municipalities and other actors who are
responsible for the final investments. Priority-setting at this stage must involve both
national and local level, to ensure that policy targets set at national level match
investment needs at local level. Furthermore, good communication here helps to
ensure that investment plans conform realistically to national affordability/borrowing.
Apart from accession relevance and environmental benefit, criteria such as financial
viability and cost effectiveness should be included.
Some possible criteria are
suggested below.

6

See ‘Environmental Financing Strategy’, October, 2000, financed by DANCEE. In the early ‘90s,
Lithuania prioritised investments to meet the Helsinki Convention.

8

2

2

:

6 (small)

Table. 2 Current Status of Environmental Infrastructure in the Accession Countries: information from Candidate Countries

Infrastructure

BULGARIA CYPRUS

CZECH
REPUBLIC

ESTONIA HUNGARY

LATVIA LITHUANIA MALTA

POLAND ROMANIA SLOVAKIA SLOVENIA TURKEY

~ 125

24 (existing)
& 3 (planned)

95

27

48

200

35

88

8

Appx 15

AIR
Large Combustion
Plants

WASTE
Landfills: total

36
2 extended
after 1997

C 2500

3

5

0

5 (small,
clinical
waste)

:

8

:

Landfills: sanitary

Incinerators: total

Incinerators: compliant

WATER
Sewage connection
rates (% of population
connected to sewage
systems)
Wastewater treatment
plants (WWTPs): total

Wastewater treatment
(% of population
connected to WWTPs)
Drinking water
connection rates (% of
population connected
to drinking water
supply systems)
INDUSTRIAL
POLLUTION
IPPC installations
Seveso installations

340

263

~ 2,000
(total illegal)
800
municipal
and industrial
728

2

288

75-8

2
(incinerators)
1 (co-
incinerator)
0

1 municipal
52 hazardous

1 municipal
41 hazardous

550

800

:

0

0

:

0

0

998

1113
municipal
and industrial

998
municipal

23 + 5 co-
incinerators

:

3

(industrial

141

87

2111

106

60

7 sanitary
landfills
2 composting

67

17

5

5

1

0

6

0

:

:

72%

45%

74.6%

77%

61.00%

76.9%

59%

100%

61

4
(31%)

959
(Urban
WWTPs)

826

496

346

785

1

63%

45%

68.6%

77%

34%

64%

52%

8%

99%

99%

86.9%

77%

93%

83%

75%

99%

82.8%
(towns)
9.9% (rural)

1,675
(industry) &
2209
(municipal)
78% (towns)
8.5% (rural)

91.5%
(towns)

51%

54.3%

53%

62%

1,000

334

132

16 completed
16 under
construction

:30%

50.8%

35%

12%

~54%

82.6%

85%

78% (urban)
62% (rural)

380 – 400
150

20-25
12

1,000-1,500
110

141
21 (10 (A) +
11 (B))

1000
319

110-130
40-50

:
150

60
7

4000
150 (Seveso
II)

:
:

646
123 (45 upper
tier)

108
50 (30 upper
tier)

:
:

9

Table 3: Criteria for Prioritisation at the Strategic Level and Project Level

Accession Issues
• Priority allocated to the directive in the
if transition

context of accession e.g.
period requested

• Status of transposition & enforcement of

relevant legislation

• Priority of

the

sector

in national
environmental
(e.g.
NPAA, Accession Partnerships, sectoral
strategies)

strategies/plans

Environmental Issues
• Severity of problem
• Health impacts
• Trans-boundary impact
• Urgency of problem
• Cost-effectiveness

of

proposed

• Part

solution
of
sustainability,

long-term strategy,

e.g.

Financial Issues
• Availability and sources of finance
• Operating & maintenance costs
• Level of income expected (e.g.

from

charges)
Technical Issues
• Complexity of project & technology

Economic Issues
• Affordability of proposed charges
• Affordability of proposed investment
• Wider economic benefits (and costs)

of project

Institutional Issues
• Environmental Impact Assessment

if

used

• Current status of project development
• Resources

available

for

project

needed
• Necessary

permits

for

construction/operation in place

development
Commercial Issues
• Responsibilities

for development &

Timing Issues
• Timing of finance (grant windows etc)

implementation clearly defined

• Commercial framework established (e.g.
contract for public-private partnership)

National and trans-boundary pressures for environmental investment priorities

In the 1990s, almost every Candidate Country undertook some form of national
environmental planning and priority-setting exercise, resulting in National Environmental
Strategies or National Environmental Action Programmes. These documents were typically
accompanied by long lists of actions, including investment projects. Many of these were
initiated in response to urgent local problems, such as the clean-up of toxic ‘hot spots’. The
Environmental Action Plan guidelines presented at the Ministerial Conference in Lucerne in
1993 recommended a cost-effective approach to industrial pollution clean-up. With the
privatisation programmes, direct responsibility for such investments passed to the private
sector, and depended on the effectiveness of the regulatory and enforcement agencies. The
driving force behind this prioritisation exercise was that national interests should come first:
and that a rational consideration of cost-benefits in pollution should outweigh international
pressures.

However, there were several cases where Central and Eastern European countries bought into
regional, trans-boundary programmes and committed substantial sums towards them. The
Helsinki Convention and the Black Triangle region, for example, both attracted substantial
investments from the Central and Eastern European countries involved. The river basin
approach contained in the Framework Water Directive encourages Member States to establish

10

trans-boundary management bodies for international rivers. This should ensure a higher
priority for the Danube and Black Sea programmes, both of which are now implemented in
the framework of a Convention7. Priority-setting should take account of these trans-boundary
Conventions and programmes. The impact of the National Environmental Action Plans
carried out in both Slovakia and Romania, for example, has meant a good level of awareness
of local environmental problems; but finding finance for the investment projects has proved
more difficult.

3.

DEVELOPING AN ENVIRONMENTAL INVESTMENT PROGRAMME

The Role of an Environmental Investment Programme

An environmental investment programme for accession plays a number of important roles.
First, it should define the projects needed to achieve compliance with specific directives. The
programme should try to assess the overall level of investment needed as well as cost
estimates for typical or specific projects. Second, it considers affordability issues, both
nationally and for specific projects. Third, it should propose a credible time frame for
implementation.

Development of a national environmental investment programme for accession is a dynamic
process, requiring regular review and updating. Some investments will be included where
there is pressure to take action because of EU or other international obligations, or because of
local health/environmental risks. On the other hand, an investment programme needs a long-
term perspective so as to include, for example, those investment needs that will flow from
new EU directives.

Strategic Investment Planning

The environmental investment programme needs to be driven by the accession process and to
be comprehensive in its coverage. It should be co-ordinated with the other tasks required for
completing the process of approximation, including transposition and implementation. It
should cover all stages in the process from strategic planning and project identification,
through investment planning and project preparation to project
implementation and
monitoring. An outline of a directive specific implementation and financing plan is included
in Annex 3, and was circulated to the Candidate Countries earlier in 2000. The outline is not
prescriptive, but draws from implementation and action plans presented by Candidate
Countries.

Where to begin

The starting point is an assessment of each Directive’s requirements, to determine the current
status of compliance and identify gaps where investment projects are needed to achieve
compliance with EU obligations. The Czech Republic carried out a detailed compliance gap
assessment for all the environmental directives, and calculated the
in
administration and personnel as well as infrastructure. They allocated the costs to public and
private sectors. This implementation plan has formed a good basis for preparing the
investment plans for specific directives where a transition time is needed. For the IPPC
Directive, Slovenia made an inventory of all plants falling under the Annexes to the directive,

‘add-on’ costs,

7

The Union is a signatory to the Danube Convention (1994) , but not to the Bucharest Convention for the Black Sea
(1992).

11

and committed themselves to ensuring that Best Available Technology standards would be
reached for each industrial sector by a specific time; they also estimated the cost to industry of
compliance.

gap

process

assessment

and
The
implementation/enforcement. It is easier to develop investments at local level when the
necessary legislation and standards are in place, while Candidate Country governments need
to know the add-on costs for monitoring, administration and enforcement, as well as operating
and maintenance costs.

transposition

should

linked

be

to

This gap assessment should lead to a list of the investments needed to secure compliance with
each directive. This will mean moving from a ‘top down’ assessment of policy gaps to a
‘bottom up’ approach, based on the identification of the need for individual plants in cities,
towns and villages. For a number of directives the private sector is responsible for
investments. This applies not only to energy or air quality, but to waste and water provision,
which in several Candidate Countries has been privatised. Here, the government’s role is to
enforce and monitor the requirements. Finding out what
local
level has to be done pro-actively and with reference to the directive’s standards and
requirements.

investment needs exist at

For some directives, investment requirements were not known until after an initial assessment
or planning exercise had taken place, for example, a national waste management plan setting
forth a strategy for regional landfills, or an inventory of non-compliant emissions from
municipal waste incinerators. In the case of the Air Quality Framework Directive and its
Daughter Directives, investment needs will become clear only after preliminary assessments
have defined zones where limit values for specific pollutants are exceeded. The next step is
for action plans to be prepared identifying sources of polluting emissions as well as least-cost
options for achieving emission reductions. For example, a high level of small particulates
could be linked to diesel engines in buses, necessitating investment in new public transport
equipment, or to the use of coal in household heating installations, which could require
conversion to natural gas.

infrastructure projects required under

The focus of an accession-driven investment programme will be the capital-intensive
environmental
the investment-heavy directives.
However, smaller scale investments needed for compliance, such as monitoring systems and
laboratories, need to be assessed also. For effective implementation and enforcement,
additional environmental inspectors will be needed, as well as new information management
systems, communication equipment and motor vehicles. If these mechanisms are not in place,
the difficulty of implementing the investment-heavy directives will increase, especially where
they involve the private sector8.

8

The investment implications of the EU requirements in the water, waste management, air quality and industrial
pollution control sectors are summarised in Annex 1. The Handbook on the Implementation of EC Environment
Legislation (Commission working document, April 2000) is a useful source of information on all the steps required
for implementing the directives’ requirements.

12

Box 1 Implementation planning in Czech Republic and Slovenia

For its negotiation of the Environment Chapter, the Czech Ministry of Environment
prepared detailed implementation plans for each EU environmental act. The plans identify
the institutions responsible for implementing each EU act, the act’s requirements, steps for
implementation including deadlines for specific requirements, the main constraints to
implementation and proposals for solutions, financial needs (institutional strengthening,
public sector investments, private sector needs), and the list of concrete projects for
implementation.

Slovenia’s Ministry of Environment prepared detailed implementation plans for
its
accession negotiations, followed by Action Plans and estimates of investment costs, to
justify transition bids. These action plans, and their time frames, have been accepted by the
European Council. They can be found on the web site of the Slovenian government.

The implementation plan needs to identify who will be responsible for carrying out the actual
investment project and for compliance with the EU requirements.
Project ‘owners’ range
from utility companies to farmers, from private companies to environmental agencies. Some
proponents will be responsible for projects under more than one directive. For example,
municipalities will often be responsible for complying with EU standards for such municipal
services as supply of drinking water, urban wastewater treatment and management of waste.
Municipal-level assessment and planning will be needed to determine the additional
infrastructure needed to comply with these multiple requirements.

Preliminary cost estimates should be prepared for the proposed infrastructure, including
operation and maintenance costs. Though most Candidate Countries have carried out some
cost estimation exercises, additional information and analysis may be required to determine
the most cost-effective strategies for compliance or to consider affordability at national,
municipal or household levels. Potential sources of finance - including government budgets,
grants, international and commercial loans - should also be identified at this stage. This
information can then form the foundation for a comprehensive financing strategy that defines
investment needs, finance sources and timing of the individual projects necessary for
achieving compliance.

This process will differ in large countries from what is possible in small ones. Obviously the
level of detail that can be developed in a country with nearly forty million people is less than
that of Slovenia. On the other hand, accession planning and compliance and project
information need to be linked at some level: in large countries, the information flow to and
from regional level needs to be enhanced. In any case, the level of detail is less important than
ensuring that the investment planning is clearly based on aggregated information, and is
credible in its forecasts.

4.

THE CHALLENGE OF IDENTIFYING AND SECURING FINANCE

Income and Affordability

Affordability is an important issue at the programme level in relation to overall national
expenditure. At the project level, income streams should be identified that will contribute to
the financial viability and sustainability of the project. These will generally take the form of
charges for environmental services, such as water supply or waste disposal. A project

13

‘affordability analysis’ will help assess the ability of consumers to pay at least a share of the
proposed charges and contribute to operating a maintenance expenditure, as well as assess the
effect of the charges on demand. There is little general guidance that can be given on what
constitutes an affordable level, but a Polish study has estimated that 4% of household income
for water use is the upper limit of affordability for consumers, while the EBRD has internal
guidance notes on this subject.
Increasing the level of charges and taxes can also lead to
significant reductions in the resource use, and hence reduce the need for new investments. For
example, charging for water in the Candidate Countries has cut demand by an average 40%,
leaving wastewater plants designed in the 1980s with surplus capacity and unnecessarily high
running costs.

A preliminary financial analysis incorporating this information will establish the broad
financial parameters of the project, such as the investment needed and the return on
investment. All Candidate Countries in the CEE have set up environmental funds, whose
revenue base comes from environmental resource taxes, charges and fines for excessive
pollution. These instruments signal an economic incentive to users to reduce pollution levels
or natural resource use and hence can encourage environmental investments, although care
must be taken not to breach the Community’s State Aid rules. The revenues raised from these
sources, and particularly from charges and taxes, since these are relatively predictable,
provide a valuable revenue stream for many environmental investments. Ideally charge and
tax levels should move towards compliance with the ‘Polluter Pays’ principle. Charges for
resource use and full-cost recovery for use of environmental infrastructures (such as water
supply, wastewater treatment and sewage networks, and waste), should be an integral part of
project financing.

Involving the Private Sector

According to the ‘Polluter Pays’ principle, the financing burden should lie as closely as
possible on investor and polluter. The importance of private investment can be seen from the
World Bank study on Bulgaria, quoted above. According to this, 46% of responsibility for
environmental investment lies with the private sector, while 43% lies with municipalities, and
only 11% with central government. Furthermore, the National Environmental Action Plans of
both Slovakia and Romania have estimated independently that almost 70% of pollution
finance needed will be in the private sector. There are many different ways of involving the
private sector in investments in environmental infrastructure in sectors that have historically
in many of the Member States been the responsibility of the public sector. In Slovakia, waste
disposal was privatised in 1995, with a firm legal framework to control standards for landfills,
and financed by municipal taxes on residents. In most Candidate Countries, municipal water
services are partly privatised, usually with a joint stock company wholly owned by the
municipality, with equity participation from investors and/or commercial banks.

Levels of private sector involvement range from contracting out project preparation to full
‘privatisation’ of the environmental service, including responsibility for collecting charges.
Private sector involvement models which stop short of full privatisation include ‘Build,
Operate and Transfer’,
‘Build, Own and Operate’, and ‘Build, Own, Operate and Transfer’
projects. Such models need to allocate responsibilities (both legal and financial) clearly and
fairly; a Commission Communication published in 2000 summarises the principles of public-
private sector partnerships as those of transparency, equal treatment and competition9.

9

Commission Interpretative Communication on Concessions under Community Law (OJ C 121, 29.4.2000).

14

A bank or financial institution may be able to offer assistance with project preparation as part
of a loan package, and commercial banks have implemented projects on behalf of
international financing institutions and grant programmes10. A contractor responsible for the
whole project
finance for project
implementation. Equipment can be leased from the supplier. Equity investment is becoming
more common, with a number of venture capital funds seeking equity shares of municipal
investments in waste and wastewater.

(a ‘turnkey’ arrangement) may be able to offer

The Role of Grant Funding

Discussion of financial engineering for public sector environmental projects in the Candidate
Countries has focused primarily on grant finance. However, most national environmental
funds lend at soft rates as well as give grants, and there are arguments for adopting a long-
term strategy away from grants, towards loans. While grants are not always consistent with
the polluter pays, user pays and full cost recovery principles,
they allow gaps in true
affordability to be addressed, enabling more projects to be implemented more rapidly than
would otherwise be the case. Grants have also played a valuable role in capitalising revolving
funds, that is, funds which lend at a subsidised interest rate and re-lend the re-paid loans. In
the early 1990s, with an undeveloped capital market in the Candidate Countries, a commercial
lending market hampered by inflation and poor regulatory framework, grants were crucial in
catalysing and leveraging concrete investments. In the framework of accession needs, well-
targeted grants could help shorten the implementation period, and thus benefit Europe’s
environment and health. Grants will be needed for post-accession ‘cohesion’, helping bridge
the gap between less developed regions and others, where the Community has a mandate to
take account of the ‘social and economic development of the Community and the balanced
development of its regions’. It also has a mandate to use the Cohesion Fund for financial
support for the environment11. In the longer term, grants could be reserved for specific,
clearly defined situations where they would act as a catalyst, and not replace equity or loan
funding. In any case, the Community rules on State Aid must be complied with12.

There are, however, problems connected to reliance on grants. Firstly, without the discipline
of market pressures to act as a check and balance, special care needs to be taken to ensure the
cost-effectiveness of the investment. Secondly, some forms of grant funding are linked to
deadlines for proposal submission, which can lead to the creation of a highly unstable ‘cyclic’
market for the companies supplying goods and services. Thirdly, grant funding is not ‘free’,
but can impose significant financial and management obligations on the receiver of the funds.
Fourthly, a lower proportion of grant funding leverages a higher proportion of non-grant
funding. However, too much stress should not be put on this latter point. It is important not to
crowd out non-grant funding by supplying too high a proportion of grant funding. The
affordability of the financial package is the key factor here. Capital can always be found for
projects where there is sufficient possibility of payback or of capital growth over the years.

Project funding strategies

There will be circumstances in which it is appropriate to negotiate loans from the commercial
banking sector. Some banks in EU Member States specialise in funding environmental
infrastructure projects in Candidate Countries. In many cases, debt finance (grants loans or

10

11

12

Loans here means commercial loans and not tied aid credits, which on the basis of an OECD Decision
(on ‘Softban’) of 1991 should be avoided for countries in transition.
Article 174, cl 3 and Article 175, cl 4, Treaty of the European Communities.
See in particular the Guidelines on State Aid for environmental protection (OJ C 37/3 3.2.2001)

15

bonds) may be complemented by equity participation. The benefit here is that the equity
owner usually looks for a capital gain rather than for an annual income. Generally this is only
possible where there is a specific company or venture in which the donor can invest. A
number of municipalities have created wholly owned joint-stock companies that can attract
such participation. On the whole, though, this option is easier for projects that are private-
sector ventures (including privatised utilities) or public-private partnerships.

investment strategy for a project has important

The overall
implications for project
preparation. Each investor will require specific information, and will probably expect that
information to be presented in a particular way. This is a difficult and time-consuming task,
particularly where several funding organisations are involved.
It also emphasises the
desirability of developing a long-term relationship with a number of key funding
organisations which are not only familiar with the situation in the country but also use
familiar application procedures. Since it can be difficult
to identify relevant sources of
funding without researching many that prove to be unsuitable, a PEPA Fund Fiche has been
developed to assist project ‘owners’ in the Candidate Countries. These fiches explain the
different aims and operational methods of the major international funding institutions.

Capacity building

Developing a successful financing strategy involves not only access to funds but improved
management and other ‘softer’ elements. Networking, training and the exchange of best
practices can contribute greatly to such success. The PEPA programme has brought together
representatives of Ministries of Environment, municipalities and managers of national
environmental funds in the region, and publicised success stories. In its next stage, local and
regional authorities will be encouraged to develop financing strategies which are tied to
accession policies. Already the Phare programme has contributed significantly to capacity
building in developing projects for ISPA and Phare programmes for the pre-structural funds.
Some Candidate Countries have joined the LIFE programme, which can help with pilot
projects. The Danish government supported a detailed financing strategy for Lithuania, which
analyses affordability from a survey of all municipal investment means. Given the large
number of ‘actors’ involved, bilateral donors are urged to offer further assistance, through
twinning or other means.

5.

CONCLUSION

An analysis of investment plans presented by Candidate Countries shows that while some
countries have now developed implementation and financing plans, and others are planned for
the coming months, there is still work to be done, in particular to flesh out implementation
plans with actual projects and actions. Furthermore, attention needs to be paid to the
preparation of financing strategies for the post accession period when Community structural
instruments will be available.

levels of administration responsible for

Larger countries with different
implementing
investment in environmental infrastructure are finding it harder to develop investment plans.
There is, however, ample scope to prepare clear and thought-through strategies without
necessarily covering the level of detail that a small country can produce at central level.
Instead,
information from the regions should be aggregated as the basis of central or
nationally developed policies and financing plans. Improved communications and dialogue
with the regions are necessary to ensure effective results.

16

Following the criteria proposed for priority setting presented in Section 2 can help improve
the quality of the investment plans. Exchanging experience can help accelerate the process.
Candidate Countries are increasingly willing to share their long-term investment plans with
other countries, as the Czech Republic, Slovenia and Lithuania have done. There are
numerous examples of good practice to be disseminated. Investment plans that have been
accepted could be circulated to contacts in national Ministries of Environment
in the
Candidate Countries. Here the PEPA programme could reinforce its role as a catalyst and
facilitator for the exchange of experience by signposting existing information and presenting
it in a manner that makes it more immediately accessible.

Member States could also focus more of their bilateral technical assistance to Candidate
Countries on developing financial strategies and sharing their own experience. More support
(through Community technical assistance programmes) should be given to activities that link
the 'top down' accession driven policy with ‘bottom up’ project identification. Training for
regional and local administrators is needed.

The Commission will continue to collect and refine information on investment and
infrastructure needs, together with information on projects: the PEPA data base already
contains over a thousand projects, from compliance gaps to project ideas to mature projects.
Community technical assistance will focus on some of the issues outlined above: on
developing projects to fill gaps identified in the investment-heavy directives, and advising on
priority projects. Assistance to develop implementation plans for specific directives will be
reinforced.

In the final analysis, however, the onus is on the Candidate Countries to prepare and present
financing strategies. Given the timetable for accession13 the need is now even more urgent.

13

COM(2000)700

17

ANNEX 1

THE INVESTMENT IMPLICATIONS OF THE KEY ‘INVESTMENT-HEAVY’
DIRECTIVES

1.

WATER SECTOR REQUIREMENTS

LIKELY INVESTOR HEAVY INVESTMENT

OTHER INVESTMENT

SECTOR/DIRECTIVE
Water Quality
Drinking Water Directive

Urban
Treatment Directive

Wastewater

Sewage Sludge Directive

Municipalities, water
utilities/companies

Municipalities, water
utilities/companies
Industrial companies
Industrial companies
Public
or
water companies

privatised

Wastewater

Urban
Treatment Directive
Dangerous Substances into
Water Directive
Nitrates Directive

Industrial companies

Industrial companies
Municipalities
Agricultural
enterprises

Water Framework Directive Regional governments
(river basin authorities)
Industrial companies
Agricult’l enterprises
Municipalities, water
utilities/companies

Bathing Water Directive

Water collection/abstraction
Water treatment plants
Water delivery/supply systems
Wastewater collection systems
Wastewater treatment plants

Surface water monitoring
DW quality monitoring (at
treatment plant & at tap)
Effluent monitoring

of

industrial

Sludge dewatering systems
Sewage sludge incinerators
Composting/treatment plants
Pre-treatment
discharges to sewers
Wastewater treatment systems
New processes (cleaner techs.)
Wastewater treatment systems
New processes (cleaner techs.)
Animal waste storage facilities
Wastewater treatment systems
Wastewater
treatment plants
(municipal/industrial), animal
waste storage facilities, etc.

Sludge transport systems
Land spreading systems
Monitoring systems

Water quality monitoring
Modelling systems
Water quality monitoring
Modelling systems
Water quality monitoring
Modelling systems

Water quality monitoring

Wastewater treatment plants

Water quality monitoring

• Council Directive 98/83/EC of 3 November 1998 on the quality of water intended for human consumption

• Council Directive 91/271/EEC of 21 May 1991 concerning urban wastewater treatment

• Council Directive 76/464/EEC of 4 May 1976 on pollution caused by certain dangerous substances
discharged into the aquatic environment of the Community, as amended by Council Directive 91/692/EEC,
and its “daughter” Directives

• Council Directive 91/676/EEC of 12 December 1991 concerning the protection of waters against pollution

caused by nitrates from agricultural sources

• Directive 2000/…/EC of the European Parliament and of

the Council establishing a framework for

Community action in the field of water policy

• Council Directive 76/160/EEC of 8 December 1975 concerning the quality of bathing water

18

2.

WASTE MANAGEMENT SECTOR REQUIREMENTS

SECTOR/DIRECTIVE
Waste Management
Landfill Directive

Waste

Waste

Municipal
Incineration Directives
Hazardous
Incineration Directive
Waste
Directive

Framework

Hazardous
Directive

Waste

Sewage Sludge Directive

LIKELY INVESTOR HEAVY INVESTMENT

OTHER INVESTMENT

Municipalities, waste
utilities/companies,
industry

Municipalities, waste
utilities/companies
Industry,
utilities, hospitals
Municipalities, waste
utilities/companies
waste transporters

waste

Municipalities, waste
utilities/companies,
industry
Municipalities, water
utilities/companies

landfill

Municipal waste
sites
Hazardous waste
sites
Closure of old landfills
Municipal waste incinerators Waste collection/transport

Waste collection/transport
Water/groundwater
monitoring

landfill

waste

disposal
(incinerators,

Hazardous
incinerators
Waste collection/transport
Integrated waste
system
landfills)
Hazardous waste landfills
Hazardous
incinerators
Landfills for sewage sludge
that cannot be used on ag
land

waste

Air quality monitoring
Waste collection/transport
Air quality monitoring
Waste collection/transport
Air quality monitoring
Water/groundwater mon.

Waste collection/transport
Air quality monitoring
Water/groundwater mon.
Laboratories
sewage sludge

for

testing

• Council Directive 1999/31/EC on the landfill of waste

• Council Directive 89/369/EEC of 8 June 1989 on the prevention of air pollution from new municipal waste

incineration plants

• Council Directive 94/67/EC of 16 December 1994 on incineration of hazardous waste

• Common Position (EC) No 7/2000 adopted by the Council on 25 November 1999 with a view to adopting
Directive 2000/…/EC of the European Parliament and of the Council of…on the incineration of waste)

• Council Directive 75/442/EEC of 15 July 1975 on waste (as amended by Council Directive 91/156/EEC)

• Council Directive 91/689/EEC of 12 December 1991 on hazardous waste (as amended by Council Decision

94/31/EC)

• Council Directive 86/278/EEC of 12 June 1986 on the protection of the environment, and in particular of

the soil, when sewage sludge is used in agriculture

19

3.

AIR QUALITY SECTOR REQUIREMENTS

SECTOR/DIRECTIVE

LIKELY INVESTOR HEAVY INVESTMENT

OTHER INVESTMENT

Air Quality

Air Quality
Framework
Directive & the Daughter
Directives

Local
&
governments; industry

regional

Controls over point sources
of air emissions; controls
over vehicle traffic flows

Air quality monitoring

AQ modelling capacity

Fuel Quality Directives

Oil refineries

Process changes

Testing systems

VOCs “Stage I” Directive

terminals, petrol
petrol

Oil
transporters,
distribution stations

Vapour seals, VOC recovery
units, fittings to enable VOC
collection during filling

• Council Directive 96/62/EC of 27 September 1996 on ambient air quality assessment and management

• Council Directive 99/30/EC relating to limit values for sulphur dioxide, nitrogen dioxide and oxides of

nitrogen, particulate matter and lead in ambient air

• Directive of the European Parliament and of the Council of 13 October 1998 relating to the quality of petrol

and diesel fuels and amending Council Directive 93/12/EEC (98/70/EC)

• Council Directive 1999/32/EC of 26 April 1999 relating to a reduction in the sulphur content of certain

liquid fuels and amending Directive 93/12/EEC

• Council Directive 94/63/EC of 20 December 1994 on the control of volatile organic compound (VOC)

emissions resulting from the storage of petrol and its distribution from terminals to service stations

4.

INDUSTRIAL POLLUTION CONTROL SECTOR REQUIREMENTS

LIKELY INVESTOR HEAVY INVESTMENT OTHER INVESTMENT

SECTOR/DIRECTIVE
Industrial Pollution Control
Pollution
Integrated
Prevention
Control
Directive
Large Combustion
Directive

Plant

&

Industry, agri-industry,
waste utilities

Industry,
utilities

energy

Solvents Directive

Industry incl. SMEs

Seveso
Directive

II

(COMAH)

Industry

Air/water/groundwater
monitoring

Air quality monitoring

Air quality monitoring

(cleaner

(cleaner

pollution

New processes
techs.)
Pollution control systems
New processes
techs.)
Air
systems
New processes
techs.)
Air
systems
Accident
measure

pollution

(cleaner

control

prevention

control

• Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control

(IPPC)

• Council Directive 88/609/EEC of 24 November 1988 on the limitation of emission of certain pollutants into

the air from large combustion plants (as amended by Council Directive 94/66/EC)

• Council Directive 1999/13/EC of 11 March 1999 on the limitation of emissions of volatile organic

compounds due to the use of organic solvents in certain activities and installations

• Council Directive 96/82/EC of 9 December 1996 on the control of major-accident hazards involving

dangerous substances

20

ANNEX 2

ESTIMATED ENVIRONMENTAL FINANCING NEEDS IN
CANDIDATE COUNTRIES

Country

BG

CY

CZ

EE

H

LV

LT

MT

PL

RO

SK

SI

Total

Total Cost
1997
Estimate
€
14
Mio

Recent
Figures
Total Cost
€
Mio

15000

1118-
1264

13400

1500

13700

1710

2380 NA

35200

22000

5400

1840

122618-
122764

8610
15

1086
16

6600-
9400
17

4406
18

4118-
10000
19

1480-
2360
20

1600
21

130
22

22100-
4280023

22000
24

4809
25

2430
26

79260-
110001

14

15

16

17

18

19

20

21

22

23

24

25

26

for

(2000) Development of

Implementation Strategies

EDC (1997) Compliance Costing for Approximation of EU Environmental Legislation in the CEEC, EDC (1999)
Approximation of Environmental Legislation - Role of Compliance Costing for Approximation of EU
Environmental Legislation in Cyprus.
Environmental Resources Management
Approximation in Environment Final Reports of Mini-Projects March 2000.
The Government of the Republic of Cyprus (8/3/2000) Explanatory Memorandum on Chapter 22
Environment.
6,600-9,000: The World Bank (1999) Czech Republic. Toward EU Accession. Washington DC. 9,400: RIVM,
EFTEC, NTUA, IIASA (1999) European Environmental Priorities: an Integrated Economic and Environmental
Assessment.
Estonian Ministry of Environment, July 2000.
4,118-9,318: The World Bank (1999) Hungary. On the Road to the European Union. Washington DC. 10,000:
Hungarian Ministry of Environment, July 2000.
1,480-2,360: Latvian Ministry of Environment, July 2000. 1,505-1,942: Latvia Regular Report (1999).
RIVM, EFTEC, NTUA,
Environmental Assessment.
Maltese Ministry of Environment (2000) Paper presented at the IBC Conference in Budapest, 13-14 June 2000.
22,100-42,800: The World Bank (2000) Poland Toward EU Accession. Washington DC. 24,900: RIVM, EFTEC,
NTUA,
(1999) European Environmental Priorities: an Integrated Economic and Environmental
Assessment.
Romanian Ministry of Waters, Forests and Environmental Protection, (2000) National Plan for Environment ISPA
Implementation.
Slovak government (2000) National Programme for the Adoption of the Acquis.
Slovenian government (1999) National Programme for the Adoption of the Acquis.

(1999) European Environmental Priorities: An Integrated Economic &

IIASA.

IIASA.

21

DIRECTIVE SPECIFIC IMPLEMENTATION AND FINANCING PLANS

ANNEX 3

Candidate Countries are required to prepare Directive Specific Implementation and Financing Plans for all
directives for which they are seeking transition periods in their accession negotiations. Directive Specific
Implementation and Financing Plans may also be helpful in planning implementation of other directives.
Where supporting a transition bid, the plan will need to present a defensible case for the additional time
period for implementation. Candidate Countries will develop their own structures for Directive Specific
Implementation and Financing Plans. A possible structure is presented below.

Executive Summary
Summary of the main steps and timescale for implementation, and justification for the additional time
requested for implementation

Introduction

1.
• Requirements of the directive
•

Summary of transition time required

2. Steps Required for Full Implementation
• Current status of practical compliance, legislative, institutional, gaps in implementation
•
•
•
• Balance between public and private investment needed

To complete legislative transposition
To complete institutional arrangements to comply with directive’s requirements
"Long list" of projects required to fully implement the directive

3. Strategy for Implementation
• Context for the strategy: socio-economic issues and institutional factors
• Proposed scenario(s) for full implementation, and assumptions
• Roles of the various actors and responsibilities for investments
•
• Approach to project prioritisation and implementation

Institutional development plan

4. Financing Costs of Implementation
• Estimated costs of implementation under selected scenario
•
• Annual costs over proposed period of implementation of investment capital, operation & maintenance

Timetable for implementation

costs
Sources of finance

•
• Analysis of affordability issues on national, municipal, and household levels

5.
Implementation Plan
• Key steps and assumptions
•
•
• Measures for supervising and monitoring implementation

Short term, medium term and long term initiatives (including short list of priority projects)
Timetable for full implementation (target date and milestones)

22