chapter6 foreign financing foreign sources of...

TA R G E T I N G T H E E N V I R O N M E N TA L I N V E S T M E N T C H A L L E N G E I N S O U T H E A S T E R N E U R O P E 195

Foreign FinancingChapter 6Foreign Sources of Finance

TA R G E T I N G T H E E N V I R O N M E N TA L I N V E S T M E N T C H A L L E N G E I N S O U T H E A S T E R N E U R O P E196

As discussed in previous chapters, securingfunds for implementing environmental infrastruc-ture projects is a very complicated process. Often,a project proponent is unable to provide invest-ment capital for the project and external assistanceis needed. Additionally, the process of EU integra-tion is identifying more infrastructure necessary tocomply with the requirements of EU directives.Investment project proponents can choose from awide range of financial products, including grants,loans, credit guarantees, equity finance, bondsand different schemes for involving private sectorcapital such as public-private partnership. Project

proponents in SEE countries are primarily seekingfinancing for large-scale infrastructure throughgrant support, loans and credit guarantees. Thepreparation of project application for financing isa lengthy and costly process. It is very importantto note that financial assistance can be obtainedfrom foreign sources not only for capital invest-ment but also for project preparation, such astechnical assistance for feasibility studies.

When a project proponent prepares the finan-cial strategy for an environmental investment pro-ject, one important step is identification of allpotential domestic and foreign finance sources


Chapter 6:Foreign Sources of Finance

BOX 23

The roles of different stakeholders in financing infrastructure projects.

Infrastructureproject

Commercial banks• capital for small and large infrastructure

on market conditions• limited project preparation

European Commission (CARDS)• assistance in institution building• enabling conditions for infrastructure

project implementation, e.g.governance and legislation

• small infrastructure finance• large infrastructure through special

programmes, e.g. ISPA

Government• co-financing mechanisms• assisting project proponent in project

development and implementation

Project proponent• ensuring cost recovery• ensuring proper project implementation• providing own contribution

Private sector• involvement in project financing

through public-private partnerships• providing capital

International financing institutions• capital for large infrastructure projects

with attractive conditions• limited project preparation• limited capacity building

Bilateral donors• capacity building• institutional strengthening• project preparation• small infrastructure finance

C H A P T E R 6 : F O R E I G N S O U R C E S O F F I N A N C E


available. A single project can be financed fromseveral sources, and donors have varying purposeand conditions for providing funding. At present,domestic sources of funding in SEE countries areunder development and the capability of projectproponents to secure own resources is very limit-ed. Therefore, it might be expected that foreignsources of finance from the European Commis-sion, bilateral donors and international financinginst i tut ions play an important role in capita lfinancing infrastructure projects in the SEE region.

Identification of possible sources of donors canbe done on two levels: national/regional strategies,which identify and prioritise a list of projects; andon the local project level, where details of possiblesources of finance are being identified.

This chapter aims at presenting an overview ofdonor activities in SEE and their involvement inenvironmental infrastructure projects. The chapteris supported by Annex 6, which provides detailed

information about funding mechanisms of donorsand international financing institutions providingassistance to SEE (See Box 23).

Sources of grant supportFinancial assistance fromthe European Union

Financial assistance from the European Unionto the SEE countries is provided mainly throughthe Community Assistance for Reconstruction,Development and Stabil isation (CARDS) pro-gramme. CARDS supports both national projectsand regional initiatives, which aim at identifyingand preparing environmental projects. Availableto pre-accession countries is the ISPA fund, whichopened up for Croatia in January 2005.

The CARDS programme was established in 2000to streamline aid for supporting the Stabilisation and

FIGURE 9

CARDS allocation to SEE countries by recipient (2002-2004)

650

600

550

500

450

400

350

300

250

200

150

100

50

0

MEU

R

Alba

nia

Bosn

ia a

ndH

erze

govin

a

Croa

tia

form

er Y

ugos

lav

Repu

blic

of

Mac

edon

ia Serb

ia

Mon

tene

gro

Koso

vo(te

rrito

ry u

nder

UN

inte

rim

adm

inist

ratio

n)CA

RDS

Regi

onal

Environmentalinvestmentsallocations

Totalallocations

Environmentalallocations

150

11 0

207

18 10

132

202

35 18

621

181

4513 12

262

40 33

75

14011 0

172

Source: CARDS Annual Programmes 2002, 2003, 2004, CARDS Regional Multi-annual Indicative Programme 2002-2004.

Note: Description of projects included in the analyses can be found in the methodology.



Association Process (SAP) to SEE countries andimplementing the Stabilisation and AssociationAgreements (SAAs). For the period of 2000-2006,EUR 4.6 billion was allocated for five priority sec-tors. Support for environmental projects is integrat-ed not only under env i ronment and natura lresources priority sectors, but also under democraticstabilisation, which involves refugee return; eco-nomic and social development with local infrastruc-ture development; and administrative and capacitybuilding with public administration reform.

The CARDS instrument provides grants andwas designed to support primarily institution-building to improve governance, legislation and, toa lesser extent, investments. In Albania, Bosniaand Herzegovina, and Croatia, EU delegations actas managing authorities of the CARDS programme.The European Agency for Reconstruction (EAR)manages the national programmes for the formerYugoslav Republic of Macedonia and Serbia andMontenegro including Kosovo (territory under UNinterim administration). CARDS financial assistanceis provided in the forms of contracts for service,

supply and work through tenders or via calls forproposals. In order to provide information on thevolume of EC grants for environmental improve-ments in SEE, allocations in the CARDS AnnualProgrammes1 and Regional Multi-annual IndicativeProg ramme2 be tween 2002 and 2004 wereanalysed. The total allocated amounts and theirshares for supporting environmental projects byrecipient are indicated in Figure 9.

Comparing the percentage share of CARDScommitments for environmental purposes to thetotal CARDS envelope between 2002 and 2004, itcan be concluded that Serbia and Montenegroincluding Kosovo and the former Yugoslav Repub-lic of Macedonia allocated about one-fourth oftotal CARDS support for environmental projects.They are followed by Bosnia and Herzegovina andAlbania at nine percent and seven percent respec-tively. Croatia dedicated only five percent of theirtotal allocation to environment (See Figure 10).However, the high allocation given Serbia is theresult of projects involving a major overhaul of theNikola Tesla A3 thermal power plant amounting to

FIGURE 10

Share of CARDS allocation in SEE countries (2002-2004)

100

Alba

nia

Croa

tia

Serb

ia

Mon

tene

gro

CARD

S Re

gion

al

Environmentaltotal

Environmentalinvestments

total

90

80

70

60

50

40

30

20

10

0

7 59

5 50

26

13

29 28 30 28

15 13

20

0

%

Bosn

ia a

ndH

erze

govin

a

form

er Y

ugos

lav

Repu

blic

of

Mac

edon

ia

Koso

vo

(terr

itory

und

er U

N

adm

inist

ratio

n)



EUR 113.6 million. From the CARDS regional bud-get, approximately EUR 14.8 million was devotedto regional environmental projects in the form ofcapacity building and other technical assistanceactivities.3 An average of 80 percent of the environ-mental allocation was devoted to environmentalinvestment. By excluding support for the energysector, only negligible amounts remain. The devot-ed amount is showing an increasing tendency,however, from EUR 5 million to EUR 28 million toEUR 36 million between 2002 and 2004.

As an example, in the CARDS budget for 2002,Kosovo (territory under UN interim administra-tion) allocated about EUR 1 million for the rehabil-itation of the ash dumps at Kosovo’s two mainpower stations near Pristina. The primary objec-tive of the cleanup project was minimisation ofcurrent environmental and health problems due toexcessive amounts of dust in the air.

The EC also provides support to large-scaleinfrastructure projects in environment and transportsectors in the candidate countries. The main toolfor this assistance is the Instrument for StructuralPolicies for Pre-Accession (ISPA). In the SEE region,this is relevant only for Croatia, which became eli-gible from January 1, 2005. For Croatia, allocationin 2005 and 2006 is EUR 25 million and EUR 35 mil-lion respectively; of the total, environment andtransport sectors were provided with EUR 30 mil-lion each. For the environment sector, infrastruc-ture projects in water supply, wastewater treatment,

waste management and air protection sectors maybe supported through ISPA (See box 24).

The European Commission also supports pro-ject preparation facilities, the principal roles ofwhich are identification, prioritisation and prepa-ration of investment projects, while simultaneous-ly attracting possible financiers. In most cases,p ro j ec t p repa ra t ion i s coord ina ted o r evenrequested by donors, such as some IFIs. In thisway, the leverage effect of EC assistance can beincreased considerably.

In 2002, the EC allocated EUR 1.7 million fromCARDS Regional for the establishment of theMunicipal Finance Facility for Transport and Envi-ronment to assist small municipalities in recon-struction and infrastructural investment. The mainfocus was strengthening the organisational andfinancial structure of local utilities and cities inSEE. Within the project, training on managementof available resources was conducted for munici-pality and banking sector staff. In 2002-2003, thefinance facility focused on Croatia and Serbia aspilots, and support was extended to other SEEcountries in 2004-2005.

The Municipal Finance Facility was managedby the EBRD, and the EU was present in thesteering committee as a supervisor. The EBRDdeveloped criteria for loan application and pro-vided loans to selected municipalities to financepriority infrastructure water, wastewater, urbantransport, solid waste and district heating pro-

BOX 24

Croatian ISPA strategy

The Croatian national ISPA environmental strategy includes priority projects for ISPA co-financing in the waste, waterand air sectors. The list of projects was prioritised, and selected projects are identified as those requiring early imple-mentation; other projects on the list are for later development and may be co-financed from other sources in future.

The national ISPA environmental strategy defines financing sources available for environmental infrastructureprojects, including:

• the budget of the central government;

• budgets of local and county governments, funds of public utility companies owned by local government providingmunicipal services (e.g. tariffs for municipal services, concession charges, special earmarked charges);

• the Environmental Protection and Energy Efficiency Fund;

• Croatian Waters funds;

• national and foreign loans from IFIs, e.g. the EBRD, IBRD, EIB, the Croatian Bank for Reconstruction and Develop-ment, and commercial banks — both local and international;

• private capital, mostly through concession agreements, especially with respect to public wastewater dischargeand waste disposal systems (B.O.T. models);

• EU pre-accession funds (i.e. PHARE, ISPA); and

• other sources (e.g. joint ventures, public-private partnerships, grants).



jects. The loan had to be co-financed by munici-palities’ own sources (See Box 25).

Another example of the operational facilitiesi s the Danube Inves tmen t Suppor t Fac i l i t y(DISF) established in 2004 by CARDS regionalsupport. Its primary goal is to support environ-mental investment in the Danube region by facil-itating and accelerating IFI financing while pro-viding technical ass istance to project propo-nents. DISF is focusing on the region of the Cen-

tral Danube Basin and its effluents, and is there-fore active in Bosnia-Herzegovina, Croatia, andSerbia and Montenegro. Facility activities focuson the water sector , par t icu lar ly on pr ior i tymunicipal wastewater treatment. Selected pro-jects are in l ine with nat ional environmentalaction plans (NEAPs) and the SAP, are consid-ered priority water-pollution abatement projects,or are other projects in the Danube River Basinwith high environmental impact.

BOX 25

Municipal Finance Facility in Croatia

For Croatia, the EBRD set up long-term credit lines within the framework of the Municipal Finance Facility. Funding waschannelled to Croatian commercial banks as financing intermediaries, and the facility provided long-term funds throughlocal banks for small and medium-sized municipalities (of population 150,000) to implement infrastructure projects.

In addition, technical assistance was available for project preparation and with creditworthiness enhancement pro-grammes, the creditworthiness of small municipalities was enhanced. Through the on-lending scheme, the capacity oflocal banks in municipal finance was improved as well.

The total contribution of the EBRD amounted to EUR 65 million, including credit lines of EUR 50 million, with theremaining EUR 15 million allocated to two to four Croation banks for risk sharing. In 2003, EUR 20 million was com-mitted to Zagrebacka Banka; the EC committed EUR 1 million from CARDS Regional, and the government of theNetherlands provided EUR 2.5 million. For creditworthiness improvement programmes, EUR 400,000-550,000 wasallocated for small municipalities and an additional EUR 300,000-450,000 was devoted to technical cooperation onadvising local banks.

The facility’s priority was to develop municipal infrastructure in line with environmental, health and safety standards.Types of investments projects included: district heating, urban transport, solid waste, sewerage systems, and the qualityof drinking water. Each sub-loan was subject to environmental due diligence and the municipalities were required toconduct public consultations.

Sources: CARDS Regional, PPC website, the EBRD website.

BOX 26

Case study: DISF support for wastewater project in Croatia

The Sewerage and Sewage Treatment Investment Project in Karlovac, Croatia was included in the DABLAS projectpipeline. As the EBRD expressed interest in financing it, the Danube Investment Support Facility (DISF) assisted in theproject preparation. The total estimated investment required for water supply and wastewater is HRK 640 million(approximately EUR 87.5 million). For the implementation of the overall project long-term and short-term investmentprogrammes were developed. The long-term investment programme identified a total capital cost of around EUR 50million and will run from 2010 to 2020. The capital cost of the prioritised (i.e. short-term) investment programme isEUR 25 million and will be undertaken between 2005 and 2009. Due to financial constraints, wastewater investmentwas given absolute priority by project developers when preparing the procurement and implementation strategy. It isassumed that national and/or international donors will finance the water supply component separately.

Developers divided the wastewater part of the project into four types of procurement packages: supply and install,goods, works, and consultancies. Each package will be funded by one source when possible. According to the pro-posed financial package of the wastewater project component, the EBRD loan is expected to cover EUR 12.5 million,grants including the ISPA fund around EUR 7.5 million, and the Croatian Waters utility company together with the cityof Karlovac would provide around EUR 5.2 million. Project implementation foresees improvement to surface waterquality and ensuring the future integrity of groundwater reserves for supplying potable water. Other types of improve-ments will be achieved in operating efficiency by reducing the disruption of drinking water supply and sewer networks.



DISF facilitates cooperation between IFIs (main-ly the EBRD, EIB and the World Bank) and CARDSin the identification and preparation of environ-mental investment projects for IFI financing. Itimplies that DISF presents the selected project toIFIs and, should the project be chosen by IFIs andhave potential for financing, the facility proceedswith project preparation. DISF carries out feasibilityand other relevant studies on the selected projectsand at the same time builds the capacity of benefi-ciaries in project preparation (See Box 26).4

The European Commission is planning toestablish two additional project preparation facili-ties for the SEE region. The first facility wouldexclusively support environmental projects, withits first task to facilitate project preparation formunicipalities and public-private partnerships inthe environmental sector with a total budget ofapproximately EUR 1.8 million. The second facili-ty will have a total budget of approximately EUR 7million for three sectors, including the environ-mental sector. The PPFs will aim at preparing pro-jects to a degree that they can be delivered to IFIs.

The EC is channelling assistance to the SEEregion in a more indirect form by faci l i tat ingregional initiatives such as the Danube-Black SeaInitiative (DABLAS). DABLAS was established withthe aim of capturing water-related investments inthe Danube and Black Sea regions. The DABLAStask force provides a platform for cooperationbetween IFIs, donors and beneficiaries to protectwa te r and wa te r - r e l a t ed ecosy s t ems o f theDanube and the Black Sea. The task force gathersthe Black Sea Commission, the International Com-mission for the Protection of the River Danube(ICPDR), IFIs, interested EU member states, otherbilateral donors, regional and international organi-sations with relevant functions, and the civil soci-ety. The Secretariat is operated within DG Envi-ronment of the European Commission.

The primary objective of the task force iscoordination of financing activities through iden-tifying priority objectives common to the region.The task force conducts project screening andprioritisation as well. As of 2005, 30 water priorityprojects were identified by the task force andnine have been fully funded. In addition, 17 newprojects have been identified through the DanubeInvestment Support Facility (DISF), the PriorityEnvironmental Investment Programme (PEIP), theBlack Sea Project Broker, the PPC officer for theBalkans, the ISPA Strategy for Croatia, and by thecountries themselves. In 2005-2006, DABLAS willcontinue development of the project pipeline andtechnical assistance.

From 2007, CARDS will be replaced by IPA(Instrument for Pre-Accession). As this is written,the instrument is undergoing changes, and detailsof the assistance provided are not yet known.

Bilateral DonorsBi la tera l donors , who channel s ign i f icant

amounts to support reconstruction and stabilisationprocesses in the region, are important sources offinance for SEE countries. Bilateral donor institu-tions are primarily political institutions, implyingdiverse strategies, priority areas and budgets, whichcan also change abruptly depending on alteringgoals of foreign policy support. External aid is pro-vided mainly in the form of grants via developmentagencies or selected ministries; some provide loansas well. Grant support is provided primarily forcapacity building, institutional strengthening, pro-ject preparation and, in some cases, direct invest-ment. Bilateral donors are mainly involved infinancing capital investment for small-scale infra-structure. However, they also play a vital role inproviding grants for large infrastructure invest-ments. In SEE countries, where local governmentsare often unable to secure co-financing on invest-ment loans, bilateral grants can make possible thevery reception of the loan in the first place. Further-more, with grants, pressure to increase tariff levelsto repay the loan can be mitigated.

Trends in bilateral donors commitments This subchapter presents an overview of bilat-

eral environmental support, in particular, to showhow the total financial environmental assistance isshared by environmental sectors , benef ic iarycountries and donor countries. The calculationsare based on the database maintained by OECDon official development assistance (ODA) andofficial aid (OA) grants.

When comparing total ODA/OA bilateral assis-tance to the SEE region from 2002 to 2004, adecreasing tendency is shown from USD 2.59 billionin 2002 to USD 421 million in 2004 (See Figure 11).One explanation of the sharp decline in bilateralsupport could be a coordinated shift of assistance toother regions due to progress in stabilising the polit-ical situation and revitalising the economy. Typical-ly, when a country has achieved a certain degree ofeconomic and political stability, grant-giving donorsmove away, while the role of loan-providing finan-cial institutions such as IFIs and commercial banksincreases. When comparing the total allocation andallocation to environmental sector projects, an inter-esting trend can be seen (See Figure 12). While



overall assistance to the region decreased, the share

of environmental projects increased from 2 percent

in 2002 to 15 percent in 2004, which shows the

growing importance of environmental projects

among bilateral donors.

Environment was supported under projects in

sectors such as water, waste, energy, environmen-

tal policy, education and research, agriculture,

fores t ry , and urban and rura l deve lopment .

Between 2002 and 2004, two-thirds of total funding

was directed to water sector projects. Environmen-

tal policy and management was supported by 10

percent; waste and the energy sector received less

than five percent combined (see Figure 13).

FIGURE 11

Total bilateral ODA/OA allocationto the SEE region (2002-2004)

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

USD

000

2002 2003 2004

FIGURE 12

Bilateral ODA/OA environmentalallocation to SEE (2002-2004)

Source: Calculation based on OECD database.Further information on base data used can be found in themethodology section.

Source: Calculation based on OECD database.Further information on base data used can be found in themethodology section.

66,000

64,000

62,000

60,000

58,000

56,000

54,000

USD

000

2002 2003 2004

2%

4%15%

FIGURE 13

Bilateral commitments by environmental media (2002-2004)

Water 61%

Environmental policy 10%

Biodiversity/site protection 5%

Agriculture/ Forestry/Fish 9%

Rural development 5%

Urban development 4%

Waste 3%

Environmental education/research 2%Energy 1%

Source: Calculation based on ODA database on environment-related allocation between 2002-2004, OECD



FIGURE 15

Share of environment-related commitments by recipient per capita (2002-2004)

2002

2003

2004

Com

mitm

ent i

n U

SD 0

00

12

10

8

6

4

2

0Albania Bosnia and

HerzegovinaCroatia former Yugoslav

Republic ofMacedonia

Serbia andMontenegro

Kosovo(territory under

UN interimadministration)

FIGURE 14

Share of environment-related commitments by recipient (2002-2004)

Source data: ODA Environment-related commitmentsbetween 2002 and 2004, OECDNote: Population data used in the calculation was taken from the World Bank website.

Source data: ODA Environment-related commitmentsbetween 2002 and 2004, OECD

25,000

20,000

15,000

10,000

5,000

0

2002

2003

2004

Com

mitm

ent i

n U

SD 0

00

Albania Bosnia andHerzegovina

Croatia formerYugoslav

Republic ofMacedonia

Serbia andMontenegro

Kosovo(territory

underUN interim

administration)

STS ex-Yugoslaviaunspecified



By looking at bilateral support channelled tothe different beneficiary countries between 2002and 2004, it can be seen that Serbia and Montene-gro and the former Yugoslav Republic of Macedo-nia benefited from the highest totals: USD 50.9million and USD 50 million respectively. The for-mer Yugoslav Republic of Macedonia received thehighest amount per capita, with an average ofUSD 8,000. This is followed by Kosovo (territoryunder UN interim administration) and Albania atUSD 4,000 and USD 3,000 respectively. Bosniaand Herzegovina and Serbia and Montenegroboth rece ived around USD 2,000 per capi ta ,whereas Croat ia benef i ted from the smal les tamount at less than USD 500 per capita (see Fig-ure 14 and Figure 15).

According to the OECD database, the follow-ing countries are providing bilateral ODA/OAgrant support for environment-related projects toSEE count r i e s : Germany , Norway , Sweden ,Greece, Netherlands, Denmark, Italy, Finland,Austria, Switzerland, Luxembourg, Spain, France,

the United Kingdom, Ireland, Belgium, Japan andthe United States. Between 2002 and 2004, themajority of bi lateral f inancial contribution —around 40 percent — was provided by Germany.Other significant bilateral donors include: Nor-way, Sweden, and Greece (see Figure 16).

Available assistanceThree-quarters of the donor institutions pre-

sented in Table 23 assist in water-related issuesand approximately half contribute to waste sectorprojects. Technical assistance for project prepara-tion is available from most countries. Financing isprovided in the form of grants, except for Kredi-tanstalt fur Wiederaufbau (the KfW Group), whichalso offers loans. In the majority of cases, the pri-vate sector is also eligible for grant support. Gen-erally flexible and dependent only on the projectitself, a maximum size for eligible projects is setby only a few donor organisations. A self-con-tributing co-financing requirement is emphasised

FIGURE 16

Share of environment-related commitments by bilateral donors (2002-2004)

Germany 42%

Norway 11%

Sweden 8%

Greece 6%

Netherlands 5%

Japan 5%

Denmark 5%

Italy 5%

Finland 3%Austria 3%

Switzerland 2%Luxembourg 2%

Spain 1%France 1%

Source data: ODA Environment-related commitments between 2002 and 2004, OECD

Note: Donor countries with less than 1 percent commitment are excluded.

TABLE 23



Overview of assistance provided to SEE region by bilateral donor institutions

Donor Donor Benefi- Water Waste Energy Technical Grant Public Private Max. Co-Country institu- ciary assist- sector sector project finance

tion ance size — require-flexible ment(millionEUR)

Austria ADA A,B,M,S √ √ √ √ √ √ 2 √

Czech MoE S √ √ √ √ √ √ 0.7Republic

Italy IMET A,B,M,S √* not √ √ √ √ 0.5infrastru-cture

Germany BMU C,M,S √* not √* not √ √ 0.25 √infrastru- infrastru-cture cture

Germany BMZ A,B √ √ √* not √ √ √BiH

Germany KfW A,B,C, √ √ √* not √ √* + √ √Bank M,S M Loans

Greece MoFA A,B,M,S √ √ √ √* inter- √ √est ratesubsidies

Nether- VROM A,B,C, √* not √* via √ √ 0.1lands M,S infrastru- EBRD 1* jointly

cture withMoFA

Nether- MoFA A,B,M √ √ √ √ √ √ √ 1* jointlylands with

VROM

Norway NMoFA A,B,C, √ √ √ √ √M,S

Sweden Sida A,B,M,S √ √ √ √ √ √ √ √

Switzer- Seco A,B,M,S √ √ √ √ √ √land

Switzer- SDC A,B,M,S, √ √ √ √ √ √ √ 0.65land C* only

Kninregion

USA USTDA A,B,C, √ √ √ √ √ √ √ √M,S

USA USAID A,B,C, √ √ √ √M,S

Japan JICA A,B,C, √ √ √ √ √ √M,S

Letter codes: A = Albania; B = Bosnia and Herzegovina; C = Croatia; M = former Yugoslav Republic of Macedonia;S = Serbia and Montenegro

Based on information in the donor fiches found in Annex 6.



by Austria and Germany; however, more donorinstitutions require some form of financial commit-ment by project proponents. Detailed descriptionon donor institutions can be found in Annex 6.

As can be seen in Figure 16, Germany chan-nels considerable support to environmental relat-ed projects in the region. Institutionally, the Fed-era l Ministry for Economic Cooperat ion andDevelopment (BMZ) and the Federal Ministry forthe Env i ronment , Nature Conserva t ion andNuclear Safety (BMU) act as donor agencies. Inseveral environmental support programmes, theKfW Group and the Deutsche Gesellschaft furTechnische Zusammenarbeit (GTZ) act under thecommission of BMZ. Details of their support canbe found in Annex 6.

In SEE, the focus area is cross-border coopera-tion with special attention to river basin protectionand other water management measures. Threemajor REReP projects of EUR 1.8 million werefunded between 2000 and 2004 with GTZ techni-cal assistance: the first project aimed at the estab-lishment of an environmental protection fund inCroatia; the second, at development of harmonisa-tion strategies with EU standards; and the third, atfinancing NGO activity. The traditional bilateralcooperation assistance is coordinated by the Fed-era l Ministry for Economic Cooperat ion andDevelopment. Within the framework of bilateralcooperation, environmental protection measureswere financed in Albania, in particular wastewatertreatment projects. In the former Yugoslav Repub-lic of Macedonia, support was provided for thedevelopment of local environmental action plansand water authorities, among others.

In Serbia, aside from wastewater managementand water resource measures , f inanc ing wasdirected to district heating projects. In Montenegroand Croatia, coastal development master planswere implemented with German support. In theRepublic of Montenegro water supply and waste-water systems in coastal areas were improved anda hydropower plant rehabilitated. In the future forSerbia and Montenegro including Kosovo (territo-ry under UN interim administration), an energyefficiency facilitation fund will be provided to sup-port and finance small- and medium-sized energyefficiency measures for both public and privatesectors. In Kosovo, water supply and wastewaterprojects were funded, as were filter systems toreduce pollution deriving from energy generation.And finally, with BMU aid, a project on draftingregional plans for water supply and wastewaterdisposal on the islands Drvenik Veli and Mali inCroatia was financed.

Aside from the traditional donor countries ofold EU member states, the role of new memberstates changed from that of recipient to donorcountry after the accession to the EU. These coun-tries are increasingly taking part in assistance pro-grammes in SEE countries. Slovakia, Slovenia andthe Czech Republ ic provide support throughREReP (the Regional Environmental Reconstruc-tion Programme); for example, the Czech Ministryof Environment provides ODA to Serbia and Mon-tenegro, their only priority country in the SEEregion. The budget for assistance to infrastructureprojects in the fields of waste management, ener-gy efficiency and drinking water supply is expect-ed to increase. Small-scale environmental infra-structure projects such as the maintenance andrecultivation of the Jovanovac Waste Dump nearKragujevac, Sumadija County, have already beenfinanced. The Czech Republic ministry of the envi-ronment contributed EUR 500,000 in 2005 to therecultivation of the waste dump in Mojkovac inthe Republic of Montenegro, applying Europeantechnical, economic and environmental standards.

Other examples of projects funded by EUcountries include:

• The Austrian Development Agency supporteda geothermal energy project in Kocani, formerYugoslav Republic of Macedonia, and provid-ed technical assistance to solar thermal energyprojects in Albania and the former YugoslavRepublic of Macedonia; and

• The Italian Ministry of Environment and Terri-tory suppor ted the Pancevo Act ion Pro-gramme, which aims to support local institu-tions and public enterprises in developing pre-feasibility studies towards remediation of envi-ronmental criticalities, with priority areas air,soil, water and waste.

Outside of the EU, Japan, the United States,Norway and Switzerland are significant donors tothe region. Some examples of their projects inthe region are:

• The Norwegian Ministry of Foreign Affairs sup-ported a project connecting the industry andpopulation of the city of Vrbas to the seweragesystem as part of the regional Kula-Vrbassewerage system;

• The Swiss State Secretar ia t for EconomicAffairs, together with the German KfW con-tributed DM 38 million to a comprehensivewa te r - supp ly inves tment p rogramme inPogradec, Albania, toward modernisation ofthe city water supply. The Swiss financing sup-



ports the population of Pogradec and neigh-boring communities with reliable access toclean water. KfW will build a sewage treatmentplant to rehabilitate the sewage system; and

• The United States Trade and Development

Agency (USTDA) funded several environmen-

tal feasibility studies in SEE, such as the “Tuzla

and Kakanj Power Plant Rehabilitation Study

and Financing Plan” in Bosnia and Herzegov-

ina, in which the USTDA co-financed part of

the feasibility study on the rehabilitation of

two thermal power plants. The total cost of the

study was USD 644,557, of which USDTA pro-

vided USD 483,418 and the remaining amount

was covered by a selected US firm.

Sources of loan supportInternational financing institutions are interna-

tional banks providing financial support primarily

to countries with economies in transition. Finan-

cial support is usually provided in the form of soft

loans, meaning that payback conditions are more

favourable than those of commercial loans. IFIs

a lso provide technica l ass i s tance for project

preparation. Therefore, these financial institutions

are considered to play a significant role in sup-

porting environmental investment infrastructure

development in SEE. The most important IFIs for

the SEE region are presented below.

The European Bank for Reconstructionand Development

The EBRD provides funds for investment to

help build market economies. The EBRD also

provides project financing for banks, industries

and businesses. All EBRD-financed projects are

designed to be environmental ly sound. Other

p r o j e c t s , s u c h t e c h n o l o g y u p g r a d e s w h i c h

improve environmental efficiency, have resulted

in environmental benefit.

The EBRD has been active in SEE countries for

several years and is progressively increasing its

long-term lending in the region, financing projects

BOX 27

Overview of EBRD activities in SEE countries

• In Albania, in the infrastructure sector, the EBRD provides assistance to the restructuring of the energy sector androad rehabilitation projects with sovereign-guaranteed financing. Water supply, urban transport and solid wastemanagement are the bank’s foci in relation to environmental infrastructure. One of the priorities of the EBRD isdevelopment of a viable project pipeline in the municipal and environmental infrastructure sectors.

• In Bosnia and Herzegovina, focal areas include the municipal infrastructure sector and institutional strengtheningat the level of operating companies. In addition, the implementation of the Electric Power Reconstruction Projectand the Thermal Power Upgrade Project are of high priority: These projects strive to foster reforms and restructur-ing in the energy sector to establish grounds for privatisation and application of European standards.

• In Croatia, the EBRD has substantially increased its involvement in the environmental infrastructure sector on thenational level. One priority is to reach small municipalities with local banks and to encourage private sectorinvolvement in investments. The EBRD will assist large- and medium-sized municipalities to develop ISPA projects.Some examples of environment and municipal infrastructure project loans are the Zagreb Solid Waste Manage-ment Programme (EUR 50 million) and INA Rijeka Refinery Environmental Rehabilitation (EUR 36 million), dealingwith upgrades to wastewater treatment and hazardous waste management facilities.

• In the former Yugoslav Republic of Macedonia, EBRD priority areas include transport, energy and municipal envi-ronmental projects. The EBRD supports the privatisation and restructuring process in the energy and transport sec-tors by promoting projects of regional importance, such as regional electricity and gas interconnections and roadnetwork rehabilitation. Furthermore, projects in water infrastructure are supported by municipal guarantee. TheMacedonian Municipal and Environmental Action Programme dealing with construction, upgrade and extensionof water and wastewater infrastructure in five utilities with a budget of EUR 62 million is one example.

• In Serbia and Montenegro, energy, transport and municipal infrastructure projects once dominated the portfolio,but the EBRD has gradually extended its focus to private-sector initiatives. To date, the EBRD has placed specialemphasis on supporting infrastructure projects with regional importance and on restructuring in the gas, oil andelectricity sectors. In Kosovo, the EBRD focuses on municipal infrastructure and energy sectors. The bank providesassistance to SMEs and assesses opportunities for technical cooperation in the energy sector.



related to SMEs, transport infrastructure, energy effi-

ciency, natural resource management, etc. In the

area of environment and municipal infrastructure,

the EBRD focuses on providing support to projects

in water supply, wastewater collection and treat-

ment, solid waste management, district heating, nat-

ural gas distribution, and urban public transport.

EBRD investment in the SEE region has increased in

recent years, particularly in Albania, the former

Yugoslav Republic of Macedonia, and Serbia and

Montenegro. The bank has been cooperating with

other financial, administrative and social institutions

active in SEE and is an active member of the Infra-

structure Steering Group (See Boxes 27 and 28).

Financing environmental infrastructureprojects in SEE countries

The EBRD finances municipal environmentalinfrastructure projects. During the period of 1991-2004, the EBRD signed agreements on 11 environ-mental infrastructure projects for loan support inCroatia, the former Yugoslav Republic of Macedo-nia and Serbia and Montenegro. The majority ofprojects were in water supply, sewage collectionand treatment. Projects ranged in scope from EUR8 million to EUR 293 million.

The European Investment Bank The EIB is the European Union financing insti-

tution created by the Treaty of Rome, and its

BOX 28

Case study: EBRD loan for the Zagreb Solid Waste Programme

The EBRD provided funding for the Zagreb Solid Waste Programme (ZGOS) as well as for the completion of construct-ing two landfill cells. ZGOS is a public company owned by the city of Zagreb, with the responsibility of rehabilitatingexisting landfills and operation of the Jakusevac landfill. The project’s global objective was to assist Croatia in complyingwith EU environmental standards linked to municipal solid waste disposal. The rehabilitation project is expected to resultin the protection of Zagreb’s groundwater sources. An Environmental Impact Assessment was prepared for project,which was accompanied by an environmental awareness-raising programme. The public was involved via intensive pub-lic consultation processes.

The total project cost was EUR 66.5 million, of which the EBRD loan to ZGOS amounted to EUR 40 million. The loanfinanced a part of the existing ZGOS municipal loan and the new investment component. Since the loan was notguaranteed by the city of Zagreb, this could be considered the first EBRD non-guaranteed direct public-utility loan toCroatia. Instead of the financial guarantee, a municipal support agreement outlining city responsibilities with regard totariff policy, corporate governance and regulatory framework was drafted. In addition, service and operationalcontracts were signed between ZGOS and the city as a part of the overall waste management strategy. The technicalassistance for contract preparation and implementation was financed by the loan as well.

BOX 29

Overview of activities of EIB in South Eastern Europe

• In Albania, a project proposal of EUR 27 million to extend and rehabilitate water supply and sewerage networksserving five municipalities was approved in 2003.

• In Bosnia and Herzegovina, EIB has funded projects related to the energy, transport and industry sectorssince 2000.

• In Croatia, support has been provided for transport, energy and municipal infrastructure related projects since2001. Some examples include a project on rehabilitation and upgrading of municipal infrastructure by localauthorities throughout the country approved in 2004 (EUR 150 million) and a project on financing small- andmedium-scale infrastructure schemes approved in 2003 (EUR 50 million).

• In the former Yugoslav Republic of Macedonia, projects related to energy and transport infrastructurewere supported.

• In Serbia and Montenegro, EIB has financed mostly water sector projects, including EUR 25 million budgeted in2004 to rehabilitate and upgrade water supply, wastewater collection and wastewater treatment networks inNovi Sad and Nis.



members are the Member States of the EuropeanUnion. EIB’s general focus is on Member Coun-tries’ integration, balanced development and eco-nomic and social cohesion. Outside the EU, EIBimplements the financial components of agree-ments concluded under European developmentaid and cooperation policies. EIB has been activein SEE countries for several years and is progres-s ively increasing i ts long-term lending to theregion. EIB has already implemented the QuickStart Package in the Balkans and is working onthe e l abora t ion of a second programme forrebuilding the economy in SEE countries. Themain interest of EIB is in financing cross-borderprojects of regional importance in the transportand energy sectors. The value of total funds avail-able for SEE countries is EUR 300-400 million peryear. Funds for environmental investment dependon the number of appropriate projects, with nospecific limit set. EIB is also involved in the activi-ties of the Infrastructure Steering Group (SeeBoxes 29 and 30).


EIB provides assistance to environmental infra-structure in SEE countr ies . The bank s ignedfinancing agreements of EUR 20-30 million to sup-port municipal water infrastructure projects inCroatia and Serbia and Montenegro. Additionally,in 2003 EIB agreed to finance small- and medium-scale infrastructure schemes in Croatia, followedby a framework loan agreement valued at EUR150 million for the rehabilitation and upgrade ofmunicipal infrastructure in 2004. EIB providesfinancing in the forms of loans, venture capital,direct loans and structured finance facilities.

The Council of Europe Development Bank

The CEB currently operates with 38 memberstates. It provides loans and guarantees for socialprojects to its member states, local authorities and

BOX 30

Case study: Water infrastructure project in Albania supported by EIB

EIB signed its first loan commitment for an environmental project in the region in 2003. The project aims at improvingwater and sanitation services in five municipalities of Albania (Durres, Korce, Lezhe, Shengjin and Saranda) and achiev-ing financial viability in the water utilities. The project entails the development of basic water supply, sewernetwork, collection system and wastewater treatment infrastructure. In addition, efforts are made to improve the finan-cial viability of the municipal water and sewerage companies concerned and to ensure sound project implementationand subsequent management. The EIB loan is primarily used to rehabilitate and extend sewer networks and collectionsystems, and construct low-cost wastewater treatment facilities. EIB is providing EUR 27 million (or 37 percent) of theEUR 73 million total project cost. The EIB loan is provided for the long term with an extended grace period underfavourable conditions and is meant to complement donor assistance from the World Bank/IDA, KfW, the Global Envi-ronmental Facility (GEF) and the government of Luxembourg. In order to ensure that the project addresses the coun-try’s needs, focuses funding efforts and avoids redundancy, it was developed in line with the Albanian Water Supplyand Sanitation Strategy jointly with the Albanian Government, municipalities, local water companies, and co-financiersalready active in the Albanian water sector.

BOX 31

Overview of CEB activities in SEE countries• In Albania, CEB has allocated resources for projects related to healthcare and basic municipal infrastructure.

• In Bosnia and Herzegovina, projects related to post-war social issues were supported, i.e. EUR 1.2 million to theDrinking Water Supply to Refugees and the Local Population of Tuzla project in 1998.

• In Croatia, CEB has already financed several projects and allocated EUR 25.5 million for quality-of-life improve-ment on the islands via investment in health, education and environmental protection.

• In the former Yugoslav Republic of Macedonia, projects dealing with housing and SME modernisation with a totalbudget of EUR 20.1 million were supported.

• Furthermore, CEB supported Serbia and Montenegro with EUR 704,000 in providing housing for refugees.



financial institutions. CEB financial instruments arelong-term loans with low interest rates and repay-ment schedules adapted to meet borrower require-ments. At present, CEB finances projects in areassuch as environmental protection, health, educa-tion, SME creation, and rehabilitation of historicheritage. The bank has participated in implementa-tion of Stability Pact for Eastern Europe objectivessince 1999 and became its official partner in 2001.CEB actively helped the preparation of a regionalstrategy paper entitled “The Road to Stability andProsperity in South East Europe.” CEB activity inSEE countries is increasing: The total amount offunds available for SEE countries in 2005 is approx-imately EUR 160 million. At present, 15-20 percentof the total approved amount relates to environ-mental projects and prevention of natural disasters.CEB is a member of the Infrastructure SteeringGroup and the Social Cohesion Initiative dealingwith health, housing, municipal infrastructure,social protection and employment (See Box 31).


CEB financed a small number of projects relatedto environmental infrastructure in Croatia and

Bosnia and Herzegovina. Since the bank’s primartymission is assisting in emergency situations andmitigating the consequences of natural and ecologi-cal disaster, the projects have strong social aspects.Projects funded include providing drinking waterto refugees and the local population in Tuzla,Bosnia and Herzegovina, and constructing munici-pal and social infrastructure facilities on the Croat-ian islands. Project costs ranged from EUR 1-26 mil-lion. Additionally, CEB assisted in a EUR 30 millionproject aimed at reconstructing houses and basicmunicipal infrastructure in 35 municipalities withmultiethnic communities in Croatia. This projectwas co-financed with the World Bank, UNHCR andother donors. CEB channels funds to SEE countriesvia the financing sector as well, with the outline ofthis scheme described in detail in Box 32.

The World BankThe WB consists of five institutions: the Inter-

national Bank for Reconstruction and Develop-ment (IBRD); the International DevelopmentAssociation (IDA); the International Finance Cor-poration (IFC); the Multilateral Investment Guar-antee Agency (MIGA); and the International Cen-

BOX 32

Case study: CEB cooperation mechanisms for the banking sector

CEB cooperation with the banking sector is increasing in the SEE region. Four on-lending schemes have been devel-oped. In the first case, the state acts as borrower or guarantor providing sovereign guarantee and subsequently lendsthrough the banking sector. A second case is CEB’s directly funding of commercial banks without sovereign guarantee.Another scheme is CEB funding of an EU financial institution, which subsequently finances projects in SEE, with oneexample the Municipal Finance Facility that supports municipal infrastructure projects in SEE countries such as Croatiavia KfW. In the fourth on-lending mechanism, an EU financial institution can borrow directly from CEB, passing fundson to subsidiaries or to an associated bank located in SEE countries to finance the project. All mentioned operationsare subject to credit risk analysis incurred by CEB. Whenever necessary, additional guarantees are set up in order toprevent solvency risks.

Source: CEB fiche

BOX 33

Global Environmental FacilityGEF is an independent financial organisation that provides grants to developing countries for projects that benefit theglobal environment. GEF projects address six complex global environmental issues: biodiversity, climate change, inter-national waters, land degradation, the ozone layer, and persistent organic pollutants (POPs). The World Bank, UNDPand UNEP are the three implementing agencies of the GEF, and each agency finances GEF activities within its respec-tive areas of competence. Seven other international organisations (e.g. the EBRD), known as GEF executing agencies,contribute to the management and execution of GEF projects.



tre for Settlement of Investment Disputes (ICSID).These inst i tut ions are owned by 184 membercount r i e s , wh ich a re jo in t l y respons ib le forfinancing WB and budgeting its funds. WB pro-vides low-interest loans, interest-free credit, and

grants to developing countries. The bank’s mainobjective is to assist countries in the achievementof the Millennium Development Goals, amongwhich are ensuring environmental sustainability,combating HIV/AIDS and other contagious dis-

BOX 34

Overview of World Bank activities in South Eastern Europe

• In Albania, WB-supported projects relate to water, sanitation, and flood protection. Examples include the WaterSupply Urgent Rehabilitation Project (USD 10 million); the Durres Water Supply Rehabilitation project (USD 11.2million); and the Municipal Water and Wastewater Project (USD 15 million).

• The World Bank in Bosnia and Herzegovina has financed environment-related projects such as the USD 18 millionSolid Waste Management project; the Emergency District Heating Rehabilitation Project (USD 20 million) and theWater, Sanitation and Solid Waste Urgent Works Project (USD 20 million).

• In Croatia, WB lending has focused mainly on infrastructure, followed by legal, justice and public administrationissues. WB supported environmental projects related to wastewater treatment and drinking water supply systemrehabilitation, including the Coastal Cities Pollution Control Project (USD 47.54 million); the Municipal Environ-mental Infrastructure project (USD 36.3 million); and the Reconstruction Project for Eastern Slavonia, Baranja andWestern Srijem (USD 40.6 million).

• The bank has approved loans in agriculture, health, education, private finance and other sectors in the formerYugoslav Republic of Macedonia. The Water Utility Improvement Project, to which WB funded USD 29.7 million,is an example of projects in the area of environment and infrastructure.

• Instances of on-going projects in Serbia and Montenegro include the Serbia Energy Efficiency Project (USD 21million); the Montenegro Environmentally Sensitive Tourist Areas Project (USD 7 million); transboundary projectIntegrated Ecosystem of Skadar Lake (USD 5 million); the approved PDF B project Tara and Lim River BasinWatershed Management (expected to be USD 10 million); and the Serbia Municipal Water and Sanitation Pro-ject (USD 29.7 million). Kosovo (territory under UN interim administration) has benefited from WB assistance, asin the case of the Pilot Water Supply Project (USD 4.6 million).

BOX 35

Case study: World Bank support for water supply and sanitation in Bosnia and Herzegovina

The World Bank supported the city of Mostar with a USD 13.38 million investment loan to create a unified water sup-ply and sanitation utility with the merger of the water companies Eastern Utility and Western Utility. The loan wasapproved in 2002, and the project was closed in 2005. The government of Bosnia and Herzegovina was the borrowerand the project was implemented by the Mostar Water Supply and Sewerage Utility. The project aimed at improvingutility services and rehabilitating existing infrastructure, and was implemented in six components:

• Under priority investments for water supply rehabilitation and improvement, equipment purchase and installationwere financed. Pump stations were constructed, new water supply equipment was installed, and pipes were replaced.

• The Water Distribution Network Rehabilitation and Improvement Fund financed the improvement of thedistribution system.

• The sewerage network rehabilitation component supported sewer maintenance.

• The Institutional Strengthening Fund provided institution-strengthening and capacity building for the Mostar WaterSupply and Sewerage Utility.

• Within the technical advisor/engineering services component, project implementation and technical assistancewas provided.

• The operating expenditures component provided financing for critical expenditures for two years after the merger.



eases , and ensur ing a g loba l par tnersh ip fordevelopment. WB is also one of the implement-ing agencies of the Global Environmental Facility(GEF) (See Box 33).

WB has been working with SEE countriessince their independence to improve living stan-dards, promote economic growth, and ensure thatfuture generations benefit from sound environ-mental practices and social development. WB pri-ority areas in environment include water rehabili-tation and reform; district heating and solid wasteservices; promoting clean water supply and sani-tation in rural areas; promoting private-sector-ledgrowth with environmental protection incentives;and supporting a transparent legal and regulatoryenvironmental framework. WB has allocated con-siderable support for environmental projects inthe SEE region; with largest shares for pollutionmanagement, water resource management andland management projects (See Boxes 34 and 35).


The World Bank supported several environ-mental infrastructure projects in each of the SAPcountries. The majority of projects were related towater supply, sanitation and flood protection andapproximately one-quarter of the total assistancewas directed to solid waste management. Loanswere provided in the forms of Specific InvestmentLoans and Emergency Recovery Loans covering 50percent of total capital investment cost on aver-age. In addition, grants of USD 2-20 million weregiven in a limited number of cases.

WB is an active part of the Infrastructure Steer-ing Group. The bank strongly supports regionalinitiatives, such as the Trade and Transport Facili-tation in Southeast Europe Program which pro-motes more efficient and cost-effective trade flowacross Balkan countries, and the Social Develop-ment Initiative which deals with the issues of socialcohesion and stability. WB also finances the BlackSea and Danube Basin Initiative with the aim ofpromoting investments and capacity building.

Cooperation initiatives of the donor community

Some of the major international financing insti-tutions developed cooperational frameworks tocoordinate activities in project financing and to pro-vide technical assistance for project preparation.Some key initiatives are relevant to the SEE region.

Infrastructure Steering GroupWith regard to project selection and prepara-

tion, an important initiative of the EC and IFIs isthe Infrastructure Steering Group (ISG). The ISGgathers the European Commission and the inter-national financial institutions involved in provid-ing financial support for infrastructure investmentin SEE countries. The ISG consists of the EC, WB,EBRD, EIB, CEB and the Office of the SpecialCoordinator of the Stability Pact. The main objec-tive of ISG is to facilitate development of regionalinfrastructure in SEE. The underlying principle isto enhance integration of the SEE region into theEU as well as among the countries with the devel-opment of regional infrastructure.

The Infrastructure Steering Group works byscreening submitted regional infrastructure pro-ject proposals; selecting projects of strong region-al character to develop regional infrastructurenetworks; consulting with possible donors; assist-ing in matching financial products with selectedprojects; involving the private sector; facilitatingproject implementation; and supervising develop-ment of appropriate institutional, regulatory andsectoral framework. ISG is active in supporting

TABLE 24

Ongoing regional infrastructureprojects as of May 2005

Sector Number Cost Percentageof (in EUR of total

projects millions)

Transport 32 3,008.19 57.95%

Energy 12 1,721 33.15%

Water andenvironment 4 322.4 6.21%

Water supply 0 0 0%

Wastewater 3 222 4.28%

River basinmanagement 0 0 0%

Environment 1 100.4 1.93%

Cross-border/Tradefacilitation 6 139.38 2.69%

Total 54 5,190.97 100%

Note: Total cost EUR 322.4 million (or USD 416.06 million),calculated with the May 2005 EC Budget Execution Rate of EUR1: USD 1.2905. Source: ISG website5



the transport, energy and environment sectors. As

of May 2005, EUR 5,191 million has been commit-

ted by ISG, with more than half directed to the

transport sector. Environment is a relatively new

field of cooperation and is beginning to gain

impetus as represented by four projects with total

value of EUR 322 million (See Table 24). Priority

environmental sectors are water supply, waste-

water, river basin management and general envi-

ronmental protection.

At present, a water supply and wastewater-

related project of EUR 29 million is being imple-

mented in Albania with the EC as the lead agency.

In Croatia, the EBRD is coordinating a wastewater

treatment plant project in Zagreb with a total cost

of EUR 135 million. Furthermore, ISG supports the

Municipal and Environmental Action Programme

in the former Yugoslav Republic of Macedonia

with EUR 58 million (See Box 36).

Project Preparation CommitteeThe Project Preparation Committee (PPC) was

established in 1993 with the principal goal of facili-

tating the identification, preparation and implemen-

tation of environmental investment projects in East-

ern Europe, the Caucasus and Central Asia (EECCA).

The PPC has recently extended its support to

the non-accession countries of South Eastern

Europe. This initiative was developed as a part of

the Environment for Europe process. The PPC

mandate, changed after the Arhus ministerial con-

ference in 1998 and endorsed at the Kiev minister-

ial conference in 2003, stated that PPC should

direct its focus on the EECAA countries, particular-

ly the poorest members concentrated in Central

Asia and the Caucasus. Though the PPC still plays

a role in CEE, it is a diminishing one. The PPC

Secretariat is seated at the EBRD in London and

other PPC officers are located in IFIs. The PPC

BOX 36

Case study: ISG project in the former Yugoslav Republic of MacedoniaISG supports the Municipal and Environmental Action Programme (MEAP) in the former Yugoslav Republic of Mace-donia. MEAP is a complex corporate development programme aiming at rehabilitating water supply and wastewaterinfrastructure in order to improve services, reduce water pollution and enhance water utilities’ operation and financialperformance; partner municipalities are Kumanovo, Ohrid/Struga, Stip, Strumica and Veles. The project commencedin 2001 and was planned to run for six years. The project was signed in 2000; however, due to ethnic unrest in 2001and the outdated data used in feasibility study, implementation was delayed. In addition, the project team had to copewith inexperienced management in the utilities and frequent politically-motivated management changes. Despite alldifficulties, the essential physical work is expected to be finished by 2006.

MEP is very complex involving several municipalities as beneficiaries and various donors of grants and loans. TheEBRD took the role of lead agency and contributed EUR 20.8 million in loans to the EUR 57.7 million total projectcosts. Other financing sources include:

• EUR 5.1 million in local contributions;

• a EUR 6.9 million grant from Switzerland for WWTP in Kumanovo;

• a EUR 3.6 million grant from Germany for water supply in Ohrid/Struga;

• a EUR 4.2 million concessional loan from Portugal for WWTP in Stip;

• a EUR 4.8 million grant from Greece for WWTP in Strumica; and

• a EUR 7.9 million concessional loan from Portugal for WWTP in Veles.

For implementation support, the following was contributed:

• EUR 1.5 million from Japan;

• EUR 750,000 from Denmark;

• EUR 1 million from Canada;

• EUR 350,000 from Switzerland; and

• EUR 300,000 from the United States for a public awareness campaign.

Source: ISG website



coordinates investment efforts in the regions andfacilitates networking between the stakeholders.

Members affiliated to the network include IFIs,multi- and bilateral donors, regional governments,and civil- and private-sector representatives. KeyIFI members include the EBRD, EIB, the NordicEnvironmental Finance Corporation (NEFCO), theNordic Investment Bank (NIB) and the WorldBank Group. Other major activities of the PPC areproviding assistance to possible project propo-nents in project identification, preparation andseeking financing. In addition, the committee alsoconducts capacity building workshops and pro-vides access to good practice, know-how docu-ments and case studies. PPC officers can alsoadvise on project preparation and financing issuesof environmental investments. The PPC networkacts as a matchmaking facility between financialsources and investment needs. Client countries inthe SEE region include Albania, Bosnia and Herze-govina, Croatia, the former Yugoslav Republic ofMacedonia, and Serbia and Montenegro.

United Nations EnvironmentProgramme Finance Initiative

Commercial banks willing to support environ-m ental investment and incorporate environmentalconsiderations into financing practices are gath-ered under the United Nations Environment Pro-gramme Finance Initiative (UNEP-FI). The UNEP-FI is a form of partnership between UNEP and pri-vate financial sector. It was established with theobjective of promoting integration of environmen-tal considerations into all aspects of financial sec-tor operations and services. In their regional activi-ties, UNEP-FI has also striven to foster private sec-tor investment in environmentally sound technolo-gies and services. To date, UNEP-FI enumeratesover 160 signatory institutions from 45 countries.As regards activity in the SEE region, a RegionalTask Force in Central and Eastern Europe (RTFCEE) was established in May 2004. This task forcecovers the EU accession states, the republics of theformer Soviet Union and the Balkans. Currently,the majority of activities are directed to the devel-opment of internal risk management proceduresto accommodate risks deriving from environmen-tal projects. The REC plays an advisory role to theinitiative. Major financial members include BankAustria Creditanstalt; Emporiki Bank; EuropeanBank for Recons t ruc t ion and Deve lopment(Chair); HVB Group; Komercni Banka; and Raif-feisen Zentralbank Austria AG.

General observations• EC support for environmental investment pro-

jects is very diverse, consisting of direct andindirect intervention. The EC generally providesassistance for national capacity building andinstitutional strengthening measures throughCARDS with the purpose of creating legal andinstitutional framework for infrastructure invest-ment. In addition, by supporting regional initia-tives such as DABLAS and ISG, the EC facilitatesthe realisation of environmental investmentsthrough donor coordination and project prepa-ration. Via these means, EC grant financing isused to a h igher degree , thus ach iev ingincreased leverage. It implies that relativelysmall grant support to create an enabling envi-ronment for investment projects and facilitatingfinancier involvement can contribute to a con-siderable number of high-value investments.

• Assistance from bilateral donor countries isavailable for a wide range of purposes includingenvironmental policy support and institutionalreforms. With regard to environmental invest-ments, such assistance plays a relevant role infinancing project preparation and contributingcapital investments. In this way, the leverage ofthe grant i s increased whi le reduc ing theamount of co-financing that project proponentsneed to ensure. Bilateral donors usually havewell-defined priorities and clear policy targets inwhich the proposed project should fit. Neverthe-less, the key constraint to the use of this sourceof funding is availability not applicability.

• IFIs play a crucial role in financing environmen-tal investments by providing loans, credit guar-antees and assisting in the preparation of theprojects. Project proponents face stringentrequirements for receiving loans, including tech-nical, economic, social and environmental feasi-bility criteria with which the project must com-ply. IFIs are the major foreign source for capitalfinance for municipal environmental infrastruc-ture projects in SEE region. However, municipal-ities face the challenge to ensure co-financingand projects large enough to meet economies ofscale while reaching the minimum project sizethreshold as well. Thus, with this source of for-eign finance, the main concern is the ability touse it, not the availability. Cooperation initiativesbetween IFIs, such as PPC and ISG, proved tobe valuable in facilitating regional environmen-tal investment and supporting project propo-



nents. Finally, loans on market conditions canbe obtained from commercial banks as well.However, their involvement in environmentalinvestments is at an early stage. An increasingform of assistance provision via commercialbanks is the on-lending scheme, e.g. IFIs or for-eign commercial banks lending to local bankswhich in turn provides loans or other financialproducts to project proponents.

• There are many opportunities in relation tofuture assistance to the region. With regard toprospective EC assistance for environmentalinfrastructure investments, Croatia will have agreat opportunity to receive capital funding ofEUR 30 million through ISPA 2005/2006. TheRepublic of Croatia will co-finance implementa-tion of the ISPA investment and technical assis-tance projects in the amount of approximatelyEUR 16.8 million, includes repayment of theEBRD loan by the end user. The IPA, a newinstrument replacing CARDS, PHARE, ISPA,SAPARD and some other programmes startingfrom 2007, will also be available for environ-mental projects. However, there is no separateIPA component for environment, and environ-mental projects wi l l be f inanced primari lythrough a regional development component.The integration of environmental concerns intothe different components will depend on thebeneficiary country. EC support will continue togrow for project preparat ion fac i l i t ies toenhance the preparation of investment projectsrelated to environment. IFIs are also increasing-ly involved in preparation and financing ofenv i ronmenta l inves tments wi th reg iona limportance. The recent expansion of ISG activi-ties into the environmental sector is proof of thegrowing interest. Besides participation in coop-eration initiatives and direct investments, IFIschannel funds through on-lending mechanismsand support the local financial sector of thebeneficiary country. Local commercial bankshave become increasingly involved in financingenvironmental projects and in providing differ-ent financial products to support private-sectorenvironmental performance.

• Considering the leverage effect of project prepa-ration and financing facilities, the EC shouldcontinue supporting these instruments. Empha-sis should be placed on increasing involvementin capital financing by the private sector. Sincelocal self-government units are the key actors ininitiating and implementing municipal infra-

structure projects, capacity building assistanceshould be targeted increasingly to municipalitiesand public-service enterprises. It is also impor-tant that these facilities provide assistance toboth large-scale and small local projects. Inorder to achieve this, increasing involvement ofbilateral donors in these activities is necessary;such donors can close the financing gap for co-financing smaller environmental projects, com-plementing EC assistance. Regarding the suc-cessful results of ISG and DABLAS in regionallycoordinated donor activities in the energy sec-tor, transport sector and water-related invest-ments, these efforts should continue in the envi-ronment and be extended to other geographicalareas and other sectors such as waste manage-ment. Currently, DABLAS support projects locat-ed in the Danube-Black Sea catchments area.Since IPA will replace the existing financingtools to the region, intensive capacity buildingtraining will be necessary upon application.Considering the important role bilateral donorscan play in co-financing infrastructure invest-ments, it is suggested that their priorities andpolicies for the SEE regions are coordinatedwith EC and IFI assistance strategies. Bilateraldonor institutions have the potential to supportfeasibility studies of environmental infrastruc-ture projects and other technical assistance forproject preparation.

• As mentioned above, IFIs are potentially thechief sources of finance for environmentalinvestment. Funds are available though verychallenging for project proponents to access,due to stringent requirements, lack of projectpreparation skills and the still-extant negativeattitude to borrowing. In order to overcomethese barriers, it is suggested that IFIs increas-ingly support capacity-building actions devot-ed to improving project preparation skills ofproject proponents, such as PPC efforts. Fur-thermore, assistance in developing nationalfinancing schemes is proposed, e.g. throughsupporting the domestic financing sector withtechnica l ass i s tance . Through on- lendingmechanisms, loans can be accessed by widergroup of stakeholders, including private sectoroperators and other publ ic proponents ofsmall scale investments; this form of supportshould therefore be expanded. National gov-ernments play a crucial role in ensuring anenabling environment for investments by cre-at ing and maintaining the necessary legal ,



institutional and economic conditions. Further-more, the allocation of EC grants betweencomponents depends largely on national deci-sions. Thus, they should provide the neededpolitical will to improve the environmental sit-uation of the countries and strive to delegatethe necessary resources to local governmentalunits in order to realise the investments. At theinternat iona l l eve l , nat iona l governmentsshould be increasingly involved in regionalcooperation related to cross-border invest-ments or environment-related infrastructureprojects having a regional impact. Local pro-ject proponents must gather information onsources of finance, financing conditions andinstruments to match projects with availabledonor support. Before approaching donors,proponents should have a thorough under-standing of financing mechanisms. By prepar-ing financially viable projects and by demon-strating clear ownership, the chance to receivesupport can increase significantly. Project pro-ponents should therefore develop strategies toattract finance and make efforts to provide therequired share. Additionally, special attentionshould be given to risk assessment, risk man-agement, time management and quality assess-ment for implemented projects.

Endnotes1 Each year, the countries concerned prepare CARDS Annual

Programmes, which are finance proposals to the EuropeanCommission. The Annual Programme describes the objectives ofthe national programme with updates on the achievements inpriority areas and identifies lessons learned. The programmecomponents elaborate on estimated costs and the requestedamount of CARDS assistance as complementary finance.

2 EUR 75 million, excluding regional funds for integrated bordermanagement, was allocated from the CARDS Regional envelopefor the period of 2002-2004 for the five SEE countries.

3 Background data for the calculations can be found in Annex 8.

4 DISF website: <www.danube-isf.com/>.

5 ISG website: <www.seerecon.org/infrastructure/projects/display.cfm?sector_ID=3&status=Ongoing>.

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