enviro funds english tatic

8/12/2019 Enviro Funds English Tatic

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Environmental Funds as instrument of environmental policy

The economic and political restructuring underway in transition countries aims to changethe role of the state, re-establish the private sector in the economy, decentralize political

power and in this process, develop a new division of tasks and responsibilities between thegovernment, the private sector and households. Part of this movement will involve thecreation of a new system of financing for environmental expenditures. Financing forenvironmental investments increasingly should be based on private sources, and follow theguidelines of the Polluter Pays Principle. n that context establishing and functioning of!nvironmental Funds is fully "ustified.

Environmental Funds are institutions designed to channel earmarked revenues forenvironmental protection purposes. #evenues generally derive from environmental chargesand taxes. They are set aside $%earmarked%& for environmental purposes rather thantransferred to the general government budget. Funds use these revenues to provide financialassistance, usually on favorable terms, for investments and other pro"ects to achieveenvironmental ob"ectives.

Different types of Environmental Funds - !nvironmental Funds take a number ofdifferent forms. 'ne key distinction is between comprehensive $or general& funds andspecific funds.Comprehensive Funds provide finance for a broad range of environmental protectionactivities $air, water, soil, noise&. (ost !nvironmental Funds in )entral and !astern !uropeare comprehensive funds. This type of Fund also exists in some developing countries. To agreat extent, comprehensive funds can be viewed as supplementing the general budget forenvironmental protection.Specific Funds , on the other hand, provide finance for an identified environmental problemor program. There are a few examples of this type of fund in the region, such as the watermanagement fund in *ungary. !xamples of specific funds in '!)+ countries include thewater agencies in France and the etherlands and the % uperfund% for the cleanup ofabandoned hazardous waste sites in the .

ndependently of their structure, !nvironmental Funds can take at least three fundamentallydeferent forms/ cash fund, endowment fund, revolving fund.Cash Fund: This form is the simplest one. The cash fund receives money from donors,fines, royalties or any other source, either in one instalment or in several tranches and spendit according to the availability of money and approval of pro"ects. 0ll spending is done on agrant basis. Pro"ect monitoring can be carried out by the fund administration. 1hen fundsare exhausted, either the fund is replenished or if it was designed as a sinking fund, it endsits operations. This is often the case with debt counterpart funds.

Endowment Fund: The endowment fund invest the funds received in an interest bearingform such as bonds, private bank accounts, real estate, etc. and spend only interest earnedon those investments. This form trades cash availability, which of course, is considerablysmaller than in the case of the cash fund, against the establishment of a long-term financialinvestment for environmental conservation.. (oreover, the establishment of administrative

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bodies is also a more long-term affair. *owever, this kind of funds re3uires a minimalfinancial critical mass to be worth it. f the capital invested is too small, the interests earnedwill be insignificant and not worth it.

Revolving Fund / The revolving fund disburses the cash in the same way as the cash fund but

it does so on a loan basis. 0 long-term financial mechanism is therefore established in thesame way as the endowment fund. *ere again, there is a trade-off, this time betweeninvestment security and immediate outreach to target groups. 0ssuming that loans made inthe context of the fund4s environmental aims are not as secure an investment as government

bonds or real estate, the funds trade greater availability of cash for its pro"ects against ahigher degree of insecurity.

Funds also vary by their territorial scope . (ost !nvironmental Funds in )entral and !astern!urope are national funds, though in some countries, such as Poland and the #ussianFederation, there are Funds at the municipal and local levels. Funds can also be organised

by ecological regions/ the water agencies in France, for example, are organised by ma"or

river basins. !nvironmental Funds can also be organised on an international scale, such asthe 5lobal !nvironmental Facility.

!nvironmental Funds vary in their institutional arrangements . The term %!nvironmentalFunds% is sometimes used to refer "ust to the revenue earmarked for environmental

protection. !armarked revenues are not necessarily lodged in a specific institution. Theserevenues can be held for redistribution in several different ways, such as a simple additionto the general budget6 a separate account in the general budget6 or as money assigned to adedicated organisation. Therefore, structural arrangements for !nvironmental Funds canrange from legal re3uirements directing the use of earmarked revenue by existing ministriesand agencies to a %full-fledged% independent organisation.

The main functions of comprehensive Environmental Funds - everal functions arenecessary for the operation of comprehensive !nvironmental Funds in !conomies inTransition. These include/

-- revenue collection6-- cash management6-- preparing a yearly implementation program $budget&6-- drafting the eligibility criteria for pro"ects6-- identifying potential pro"ects6 soliciting application from potential recipients6-- pro"ect appraisal/ evaluating pro"ect applications6-- final evaluation and award by decision-making group6-- disbursement of funding6-- administration/ personnel, accounting, research6 and-- monitoring and evaluating pro"ects and programs.

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n addition to the current roles of environmental funds, it is worth considering the followingoptions/

mobilising private capital from commercial banks, and the co-financing of loans bycommercial banks for environmental infrastructure measures6

serving as a financial intermediary for F s6administering other state subsidy schemes6utilising the ! tructural Funds and )ohesion Fund6supporting soft measures to strengthen absorption capacity6

providing technical assistance to central and regional authorities6 andhuman resources and 3uality assurance as a critical factor for success.

ot all these functions should to be carried out by the Funds themselves. #evenue-raising,for example, could be undertaken by other environmental authorities or by tax authorities.The core Fund activities revolve around the pro"ect cycle, including pro"ect appraisal and

pro"ect finance. !nvironmental Funds need a management structure to undertake these mainfunctions and tasks. 'ther important management activities may include budget preparationand financial management, monitoring ongoing pro"ects, and post-pro"ect evaluations.

n addition, a decision-making authority is needed to oversee Fund operations, approve budgets, programs and large expenditures, as well as to ensure that the Fund followsnational environmental policy and government financial re3uirements. This power is usuallyvested in a board of directors, which in many countries is chaired by the (inister of!nvironment. *owever, the Fund should be ultimately accountable to government andParliament, which should approve its budgets.

Funds may benefit from advisory mechanisms, such as an advisory board of independentexperts. uch mechanisms can contribute substantively to the Fund4s operations and enhanceFund credibility and acceptability. 0n advisory Forum to discuss ma"or issues with differentstakeholders $industry, environmental groups, and regional and local governmentrepresentatives& may also be useful.

The legislation for Funds in )!! countries establishes a general and comprehensive set ofobjectives . The stated ob"ectives vary, but can include/

-- promoting activities and investments to protect and improve air 3uality and water 3uality,to minimise waste generation, or to preserve soil6

-- encouraging the development of an environmentally more benign economic structure6-- sponsoring research and development activities and pro"ects6-- promoting activities to protect natural values and natural habitats and preserve

biodiversity6-- encouraging environmental education and training6 and-- improving environmental monitoring systems.

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n practice, the main role of Funds in )!! countries has been to provide financial assistancefor environmental protection investments and environment-related infrastructuredevelopment. n some countries, Funds also play an important role in financing stateadministrative tasks such as monitoring and enforcement, as well as some state

environmental research and development activities.

!nvironmental Funds provide a means for overcoming the institutional and market failuresencountered in the transition period. 9y reducing the financial burden of environmentalinvestments on enterprises and households, Funds can accelerate the pace of environmentalimprovement. 5enerally, Funds will contribute less than the full costs of an investment sothey can be a valuable mechanism for leveraging resources from domestic and foreignsources.

Funds can also perform important institutional strengthening functions/ they can helpdevelop the expertise which is fre3uently lacking in the region for the effective preparation,

evaluation and financing of environmental pro"ects. 9y working with commercial banks,they can help transfer these skills to the private sector.

0s an environmental policy tool, the Funds can help channel much needed resources toenvironmental problems which impose real and significant costs on society, and ensure thatthese resources are used in a cost-effective manner. The subsidy element provided by Fundscan be used as an incentive to reinforce the effectiveness of other policy tools such asregulations and economic instruments.

9y providing resources for environmental expenditures, particularly in the industry orenergy sectors, Funds can help to breakdown the barriers to cooperation that fre3uently exist

between environmental and sectoral ministries in !conomies in Transition.

Funds can play a pivotal role in supporting the development and implementation of ational!nvironmental 0ction Programmes $ !0Ps&. Funds could provide both analytical skillsand financial resources needed in the development and implementation of !0Ps.

!nvironmental Funds financed by environmental charges, taxes and fines, may also be "ustified under extended definitions of the Polluter Pays Principle. 9y making pollutersresponsible as a group, earmarking of environmental taxes and charges overcomes thedifficulty of linking individual polluters to damage and provides an alternative to makingthe general taxpayer foot the bill for cleanup. Thus, !nvironmental Funds can function asmechanisms for recycling funds from polluters in general to address the environmental

problems most in need of remedial action.

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Important factors for establishing an Environmental Fund:The environmental issue to be addressed is significant, and appropriate actions torespond are long term and can be met with the resource flows an !F could produce.There is active and broad based 5overnment support for creating a mixed, public-

private sector mechanism that will function beyond direct government control.

There is a critical mass of people from diverse sectors - government, 5's,academic and private sectors, donor agencies ; who can work together despitedifferent approaches to nature conservation and sustainable development.There is a basic fabric of legal and financial practices and supporting institutions$including banking, auditing and contracting& in which the ma"ority of people haveconfidence.There is a legal framework that permits establishing the fund, and tax laws thatallow it to be exempt from taxes.There are mechanisms to involve a broad set of stakeholders in the design process,and willingness by these stakeholders to use them.'ne or more mentors $e.g. another more experienced fund or an experiencedinternational 5'& are available to provide technical support to the new fund.There are realistic prospects for attracting a level of capital sufficient for the fund tosupport a significant programme while keeping operating costs to a reasonable

percentage.There is an effective demand for the fund4s products, i.e. a client communityinterested in and capable of carrying out environmental activities on the scaleenvisioned.

onditions for an efficient operation of an environmental fund - !stablishing a!nvironmental Fund is one thing. !ffective operations of this fund in another thing andaccording to the 5!F review of all existing !Fs re3uire specific conditions/

)lear and measurable goals and ob"ectives, and a results-oriented managementculture that learns from experience and is open to changes in approach based onfeedback.0 governance structure with appropriate checks and balances, conflict of interest

provisions, and succession procedures.(embers of governing bodies who are prepared to commit their time, engage infund policy-making and leadership, and build support with varied constituencies.


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Disbursing Fund resources - !nvironmental Funds can use different approaches fordisbursing resources, including/

direct grants,direct loans,grants on interest payments,

loan guarantees,loans provided through financial intermediaries, ande3uity investments.

n evaluating these different mechanisms, it is important to keep in mind that !nvironmentalFunds provide, first of all, a subsidy for environmental activities. This should bedistinguished from financing. 0 subsidy can be defined as a transfer of money on terms thatare more favorable then those prevailing on the market. n general, when public agenciessubsidize environmental activities, they do so in order to stimulate the recipients toundertake efforts and to spend more of their own resources on environmental improvementthan they would have been willing to do otherwise. 0 subsidy usually increases recipients4spending. The lower the re3uired resources that recipients must provide, the stronger theeconomic incentive provided by the subsidy. The Fund should seek to stimulate, and not toreplace the recipient4s spending. n addition, re3uiring a contribution from the recipient canhelp reduce the financial risk, as it should help ensure that the recipient has a vested interestin the pro"ect4s success.

n choosing disbursement mechanisms, Funds need to take into account/the different incentive effects,administrative costs, andfinancial risks associated with their use.

The main sources of revenue for Environmental Funds in transition countries have been/environmental charges and fines, and specifically charges and fines on pollutantemissions.foreign sources of revenue, such as grants from foreign assistance programs.direct transfers from the government budget,revenues from the privatization of the state companies .

!nvironmental taxes are considered payments for using environmental goods and services,introduced with incentive or revenue raising purpose in mind, but which are used for

general government revenue .

!nvironmental charges, in turn, are used to refer to those payments that are used to financethe provision of collective services, as well as those earmarked to an extra budgetary fund .

#hich are the most appropriate charges for Environmental Funds$ Emission charges!ser charges .

"nput product chargesConsumption product charges

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#enalties and fines for noncompliance$

The '!)+ guidelines suggest several basic criteria to be considered for both incentive orrevenue instruments/

environmental effectiveness6

economic efficiency,administrative efficiency $minimizing compliance costs and administrative costs&6e3uity, andacceptability.

These imply several elements that should be part of a revenue raising system/ -- a clear framework and ob"ectives6 -- a well-defined field of operations6 -- a simple mode of operation6 -- integration with sectoral policies6 -- low costs of implementation6 -- assessment of economic and distributive conse3uences6 and -- conformity with general principles for national and international trade $including the

Polluter Pays Principle&, with fiscal policy, and with environmental policy.

Foreign sources of finance - !xternal resources may be channelled through Funds in theform of/

grantsconcessional $ soft &loans from bilateral donors,market rate loans from international financial institutions,debt for environment swaps$

9ilateral donors and international financial institutions may find that using the!nvironmental Funds as intermediaries for financing environmental investments can

provide a number of advantages /

-- !nvironmental Funds have often accumulated expertise in identifying promisingenvironmental pro"ects, some of which may fit the priorities of foreign donors.-- ome bilateral donors and international financial institutions face problems finding localcounterpart funding. n many cases, these donors and institutions re3uire such funding,since local financial commitment assures the sustainability of the pro"ects. !nvironmentalFunds can provide resources to co-finance environmental investments.-- !nvironmental Funds may be better able to undertake innovative financing arrangementsthan government ministries. Their pro"ect portfolio is usually flexible and may include

pro"ects that meet special conditions re3uired by the donors.-- !nvironmental Funds may provide a cost-effective way for bilateral donors orinternational financial institutions to channel their money to small pro"ects and recipients.

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The role of the Environment %inistry - n many )entral and !astern !uropean countries,the !nvironment (inistry provides the institutional base for Fund operations.

The main advantage is/

that the public finance nature of Fund spending is directly underlined.it is easier to ensure this spending supports national environmental policy goals andare in line with overall economic policy.the responsibility for oversight is clearly assigned.

The danger , however, is/that the (inistry may become guided by short term political interests.administrative rules, including civil service pay scales, can make it difficult to attractand retain a sufficient number of ade3uately trained staff inside the (inistry.

The main conclusions of the St. Petersburg Guidelines on Environmental Funds:

D To avoid or minimize the long-term economic inefficiencies inherent in earmarking offunds, expenditure should be targeted to meet environmental priorities and promote pro"ectswith large environmental benefits relative to their costs.D !nvironmental funds should play a catalytic role in financing, ideally offering no moresupport for pro"ect than is necessary, adapt to changing economic conditions, and support,not compete with, emerging capital markets.D !nvironmental funds should be used in con"unction with, and reinforce, otherenvironmental policy instruments, such as compliance schedules, environmental auditing

programs and voluntary agreements.

D !nvironmental funds should develop an overall financing strategy, follow clear andexplicit operating procedures for evaluating and selecting pro"ects, adopt effectivemonitoring and evaluation practices, and make effective use of internal and externalexpertise to enhance administrative efficiency.D For investment pro"ects, funds should have well-designed program and pro"ect cycles toensure cost-effective use of resources.D !nvironmental funds should leverage increased private sector resources and capital marketfinancing for environmental investments.D n defining and evaluating fund revenue mechanisms, environmental authorities should tryto ensure environmental effectiveness, economic and administrative efficiency, e3uity andacceptability. ystems should provide a stable base of revenues, be simple in structure, and

be easy to monitor and enforce.D !nvironmental funds should ensure transparency and should be accountable togovernment, parliaments, and the public for their actions.

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urrent problems - t is possible to identify the following issues currently faced by manyof the funds, which will doubtless have an impact on the future/

D unstable andEor decreasing revenue stream6

D unclear or vague long-term strategy6D low level of mobilisation of other capital $private, in particular&6D vulnerability to political influences6 andD pressure to change their extra-budgetary character.

&e' challenges for Environmental funds in the conte(t of E) accession - ssues thatshape the future operation of the funds are/

D drastically increased need for investment financing of public environmental infrastructuredevelopment in order to meet ! re3uirements6

D pressure for pro"ect selection that might be directed to maximize and capture ! subsidies6D increased need for financing in order to strengthen institutional capacity for enforcementand monitoring6 and

D strong lobbying for subsidizing private sector environmental expenditures undertakento meet tightened environmental legislative re3uirements.

Environmental funds can play an important role in the E) accession process via theirrole in financing investment programs and strengthening monitoring and enforcementactivities. *owever, they should focus not so much on reducing the financial costs of anyenvironmental investment, but rather on concentrating their resources on supportinginvestments that will help to achieve clearly stated priorities and ob"ectives. Furthermore,the funds should place the goals related to !uropean integration on their priority lists. t isnoteworthy to consider how the process of ! accession and the accompanying measures,in terms of additional funding sources available for candidate countries in the coming years$i.e. before and also after the accession&, will have implications for the work ofenvironmental funds

Prepared by/0ss Prof asim TatiG, Ph.+.Faculty of !conomics ara"evokasim.taticHefsa.unsa.ba

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enviro funds english tatic

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