Transcript The Role of Governments in Financing Water and Environmental Infrastructure ANIL MARKANDYA WORLD BANK Improving Management of Public Environmental Expenditure Global Forum for Sustainable Development Paris December 18-19,

The Role of Governments in Financing
Water and Environmental Infrastructure
ANIL MARKANDYA
WORLD BANK
Improving Management of Public
Environmental Expenditure
Global Forum for Sustainable Development
Paris
December 18-19, 2003
KEY QUESTIONS
A. Why should the government be involved in
financing water and environment
infrastructure?
B. How should this financing be organized?
C. How should the role of the government be
evaluated?
D. What can we say about current performance
in this area in non-OECD countries?
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A. Why should the government
be involved?
The private sector will not provide enough to
meet social objectives of e.g. the MDGs?
But why does the private sector not provide
enough?
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Social benefits cannot be captured by the private
sector (externalities, social objectives)
Access to finance for such investment is limited in
developing countries
Returns to such investment are lower than for
other private sector investments
Industry cannot afford the required investment.
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Why should the government be
involved?
But these reasons for low private sector
involvement are not sufficient to justify state
provision.
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Externalities can be internalized via fiscal
incentives
Access to funds can be facilitated by special
financial agencies
The problem is that, in many developing and
transition countries, these instruments are
not adequately developed and take time.
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Why should the government be
involved?
Hence government financing should be seen
as an evolving process, where direct provision
declines over time and indirect instruments
are used to increase private provision.
Smaller government share can be measured
by increased leveraging of public funds.
Nevertheless, there will always be a core of
financing that will be needed from the
government, to cover management and
regulation, protection of pure public goods
(water sources on public land), and financial
support for social objectives.
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B. How should the role of the
government be organized?
Main issues are:
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Financing from general taxation versus
earmarked funds.
Expenditure from central versus local
budgets
Use of government department, specialized
agency (e.g. environment fund, water
agency), public utility?
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General Versus Earmarked Funds
Case for earmarked funds is strongest when
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Revenues are raised from charges levied on
environmental services and used to provide the
services (e.g. protection of water sources)
When an environmental charge that is
environmentally and economically desirable can
politically only be levied when revenues are
earmarked.
In many cases pollution charge revenues are
earmarked in OECD and developing countries
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General Versus Earmarked Funds
Case against earmarked funds is:
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They make fiscal discipline more difficult
(I.e. control of overall spending). But not
that earmarking is not the same as making
the funds extra budgetary.
Allocative efficiency is less (spending on
the environment is determined by
revenues, not by the return on the
investment relative to other investments.
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General Versus Earmarked Funds
In general the case for having some
earmarked funds for the environment is
strong.
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On grounds of linking spending on
environmental services to payments made
for those services.
On grounds that fiscal instruments such as
taxes can only be levied successfully if they
are earmarked.
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Central Versus Local Budgets
If the revenues are to be closely connected to
the expenditures (the benefit principle), local
control of the spending is more desirable.
On the other hand if expenditures are to be
based more closely to national priorities,
central control is better.
In practice both are needed and a
compromise has to be reached. Central
budgets also tend to be used more cost
effectively (see below).
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Type of Institution
Budget institutions versus specialized
institutions.
The budget institutions apply budgetary
control rules, which are easier to track, and
facilitate fiscal discipline and transparency.
Specialized institutions such as environmental
funds are often found to have lower levels of
transparency.
The cost effectiveness of budget institutions
is considered to be higher but this should not
be exaggerated.
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C. Evaluating the Role of the
Government
The OECD has proposed a number of
criteria for evaluating this role in the
environmental area:
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Environmental Effectiveness
Fiscal Prudence
Management Efficiency
But all these are predicated on sound
data collection, which remains a serious
problem!
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Role of the Government: Environmental
Effectiveness
Public funds should not be used for investments that
would have been made anyway.
Nor should they be used when the same objectives
can be achieved through policy reforms (e.g. removal
of subsidies)
The program of expenditure should be clear,
consistent and open to scrutiny.
The environmental objectives should be defined and
monitored.
Cost effectiveness indicators should be used to
design and monitor the program
The funds should be leveraged as much as possible.
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Role of Government: Fiscal
Prudence
All public funds (even if earmarked) should be
subject to the same fiscal discipline.
Earmarked funds should be required to adopt
allocation rules as close as possible to those
for other funds.
Spending by environment funds is subject to
control to avoid quasi fiscal deficit
Spending is subject to audit and transparent
ex-post reporting
All revenue collection is only done by the
same authority and national procurement
rules apply to the environmental funds.
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Role of Government:Management
Efficiency
Expenditure program is governed by clear, written rules, is
based on consultation with civil society and carried out by a
governing body representing all key stakeholder .
Day to day management is undertaken by a separate technically
competent body.
A sound project cycle is adopted, laying out how project are
prepared, how they are appraised and selected.
Communication policy ensures that all applicants have equal
access to information on funding opportunities and equal
opportunity to have their projects impartially reviewed on a
merit basis. Those who prepare the projects do not appraise
them.
Financial products used are based on capacity to manage the
risks. Grants are the simplest, followed by subsidies, loans, loan
guarantees etc.
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D. Actual Experience With
Environmental Finance
What do studies carried out by the Bank
tell us about the actual experience in
environmental finance?
Recent studies include:
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Dominican Republic
India
Ukraine
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Actual Experience
First and foremost we have a real problem
finding out what has actually been spent on
the ‘environment’!
Public spending has to be analyzed in the
wider context of all environmental spending
as the pubic/private division is changing over
time.
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In Indian study private sector data were not
available
In DR data only partial public spending data were
available
In Ukraine public and private data were available
but private spending looks too high.
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Actual Experience
Given the problems of measurement it
is difficult to assess the environmental
effectiveness, fiscal prudence and
management efficiency.
Both the DR and Indian studies could
not make a real estimate of these
factors, except in a few ad hoc cases.
In the Ukraine study a more detailed
estimate of these effects was made.
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Reality Check: Ukraine Case
Study
In Ukraine: Background Data
• At aggregate level, environmental expenditures have
fallen from around US$1 billion in 1996 to US$600
million in 2000.
• Total expenditure in 2000 as % of GDP is comparable
to other CEE and OECD countries, but share of
investment in total is less. In OECD it averages 27%
and is much higher in countries ‘catching up’ (e.g.
Portugal). In Ukraine it is 22%.
•Budgetary resources amounted to US$35 million in
2000, making only 6% of total environmental
expenditure. This is very low and much lower than in
OECD countries and CEE countries.
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Assessment of Environmental
Effectiveness
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Environmental Effectiveness
By and large public funds are being used for
the environment where other funds are not
available. Enterprises and utilities could not
afford to make the investments on their own.
Other policies that achieve environmental
targets are being pursued (e.g. pollution
charges are being raised to make up for
inflation, integrated permitting is being
introduce) but more can be done w.r.t.
compliance on environmental standards and on
leveraging public funds.
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Environmental Effectiveness
National environmental policy has not been
formulated in terms of specific environmental
targets against which one can measure
achievement.
The policy statements are mostly declarative
in nature and do not provide priorities within
the broad goals.
There are some specific goals related to
environmental policy articulated in the
national and regional “Environmental
Programs”.
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Environmental Effectiveness
The biggest problem with all these programs: under
funding. They contain much more than can be funded
and the % actually implemented is mostly <10%.
There is no way of knowing whether programs actually
implemented are the ones with the highest priority.
Tendency is to start a large number of projects and
programs then argue for funds to complete them. (a
practice common in the Soviet Union).
The bulk of state spending is on ‘water resources
protection’, This is broadly consistent with national
priorities.
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Related Question on Environmental
Effectiveness: Is Overall
Environmental Expenditure on
Environmental Protection Adequate?
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Environmental Effectiveness
Data show that while overall level is consistent
with other countries, public share is too low
and investment share is too low.
Composition of environmental expenditure has
important implications.
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For example: The low share of public expenditure
means that not enough is being spent on public
goods -- such as monitoring of environmental
quality, and protection of nature reserves and
forests. In transition countries the state also, rightly,
supports investment in water supply and sewerage,
in other key areas of infrastructure and in key
industrial enterprises, on public good grounds
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Recommendations on
Environmental Effectiveness
Link priorities with specific
environmental goals and outcomes
Link expenditures more closely to
priorities
Increase overall public investment on
the environment.
Increase flexibility in allocation between
public investments at different levels.
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Assessment of Fiscal Prudence
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Fiscal Prudence
The level of prudence is good in that:
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Environmental expenditures do not
contribute to macroeconomic problems
Environmental funds are subject to audits
Environmental charges are collected by
national tax authorities
The same procurement rules apply for the
environment funds as for other government
spending.
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Fiscal Prudence
The level of prudence is less good in
that:
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Decisions on environment spending are not
always made in a manner consistent with
other areas of spending (but other areas of
public spending are also not that clearly and
transparently done).
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Assessment of Management
Efficiency
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Management Efficiency
Ample evidence: expenditures are not efficient in the
sense of selecting the programs and projects with the
highest net benefits or obtaining the maximum
improvement in any physical indicator per dollar spent.
Assessing efficiency is not easy; benefits, especially
from better protection of natural resources are difficult
to quantify. Also the use of cost effectiveness criteria,
well established for investments in sectors such as
health and education, are less so for the environment.
Nevertheless, tools and techniques for such
assessments are increasingly becoming available and
should be used in Ukraine.
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Management Efficiency
Efficiency is of course not simply a matter of using
CBA/CEA.
 Are policies based on proper consultation?
 Ukraine has a reasonable system of consultation in deciding
its environmental programs but it can be improved.
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Is it easy to track expenditures by category and
know when a spending unit has not delivered or has
overrun the cost?
 The monitoring of environmental expenditures is quite weak
and accountability, especially at the local level, needs to be
strengthened.
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Does the method of allocation prioritize items within
a program, so that when funds are inadequate the
highest priority items are included?
 It does not.
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Management Efficiency
Ukraine’s principal sources of public
environmental expenditure = state and local
budgets, and special, earmarked
environmental funds linked to revenue from
pollution charges.
The contributions from the Environment
Funds can be in the form of direct
investments or grants on a matching basis.
The system of environmental funds is
extensive and includes over 1,600 regional
and local funds
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Management Efficiency
The sheer number of these funds is clearly
inefficient. On the other hand, local
government control is valued since decisions
about how to spend resources can be made
closer to where environmental problems
exist. Compromise is needed.
The income of the funds comes primarily
from pollution charges on emissions of air,
water and waste. The highest revenues
collected were for air pollution while the
greatest expenditures are on mitigating water
pollution.
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Management Efficiency
Data disaggregated by region show that compliance
rates with charges and fines are lower in the regions
where pollution is higher; and in these same regions,
fines are less likely to be imposed on firms.
In some regions, this may be an indication that
where charges become too high, firms have more
problems paying.
Most likely however, lack of payment is a result of
corruption in the system. The empirical analysis is at
least consistent with a picture where large firms
lobby successfully for exemption, while smaller firms
bribe tax officials or simply do not pay the charges.
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Management Efficiency
The purpose of the pollution charges is not to
reduce pollution; given their low levels, they
do not provide an incentive to make
investments in environmental improvement.
Rather it is to raise revenue for
environmental protection. Over the last five
years or so, these charges, which were fixed
in nominal terms, have had their real value
eroded. Since there is a continued need to
maintain this expenditure, and there is no
other clear source of financing, some
restitution of their real value is justified.
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Management Efficiency
More generally, are Environmental Funds an important
way to finance environmental expenditures? For the
time being, yes.
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To ensure a minimum level of funding for the environment,
there is no alternative available now and the present system
has some features to commend it.
The National Environment Fund does operate relatively
effectively; projects are properly processed and it is open to
adopting better methods of appraisal. It can also act as a
source pf leveraging of funds for pollution abatement, if
appropriately designed and if banks see support by the Fund as
an indication that the project is justified.
At the same time, there is a need to overhaul the system of
local funds – there are too many of them – and to change the
system of subsidization across regions.
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Recommendations on Efficiency
In the longer term, however, the
program of comprehensive public
finance reforms that ends all
earmarking and subjects all revenues to
integration into the public finance
system implies that the Environment
Funds will be phased out. Some
‘sunset’ provision is therefore needed.
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Recommendations on Efficiency
Increase transparency and public
disclosure
Consider introducing international
expenditure standards to better monitor
environmental expenditures
Enhance accountability
Introduce economic appraisal
techniques for environmental projects
and programs
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Recommendations on Efficiency
Refine the institutional and legal structure for
environmental funds:
Reduce the number of funds:
Spend resources close to where they collected
Introduce more rigorous guidelines for use of
funds
Introduce more rigorous guidelines for use of
funds
Evaluate the success of funds with respect to
outcomes
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Recommendations on Efficiency
Phase out Environment Funds in the Long Run
Increase pollution charges to make up for
some of the lost value due to inflation (400%
since 1996)
Eliminate exemptions
Streamline the pollution tax structure (jump at
Max. allowable emissions is too sharp).
Strengthen oversight to reduce corruption
Reduce charges if most enterprises in a region
cannot pay
Simplify pollution tax procedures
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