Most States in Eastern Europe, Caucasus, and Central Asia (EECCA) have established comprehensive Environmental Funds on national, regional (i.e., sub-national), and/or local levels. These Funds are domestic public entities that provide earmarked financing for a wide range of environmental improvements for both public and private sector enterprises. They typically operate as extra-budgetary mechanisms, but some EECCA Funds have been consolidated in the national budget while still earmarked for environmental projects.
In EECCA States, Environmental Funds are most often a part of the administrative structure of the environmental regulating authority, such as the Ministry or State Committee of Environment and regional/local administrations. Even on a national level, few EECCA Funds have well-established executive offices with qualified staff and clearly defined responsibilities. The management of the Fund is typically carried out by various departments of the Ministry of Environment, and the role of the political (rather than administrative) body often is significant in making final decisions on project selection.
Environmental Funds often provide subsidies for environmental improvement projects. It is projected that increased enforcement of environmental standards, permits, and taxes will lead to increases in private financing of such projects. At the same time, tightened governmental budgets will contribute to improved cost recovery in public services (and fewer subsidies). During the transition to a market economy, however, several factors limit the development of an effective environmental finance system based on the Polluter and User Pays Principles. These factors include: weak environmental management and enforcement, underdeveloped capital and financial markets, scarce private financing, uncertain political and fiscal systems, and weak civil society. Therefore, earmarked Environmental Funds have a role to play as a supplementary instrument of environmental policy in transition economies. As EECCA States make the transition to a market-based economy and develop healthy financing sectors, it is expected that Environmental Funds will be phased out.
In order to be effective, Environmental Funds must apply certain good performance standards, such as those outlined in the OECD Good Practices of Public Environmental Expenditure Management (PEEM). The Good Practices of PEEM build upon the 1995 St. Petersburg Guidelines on Environmental Funds in the Transition to a Market Economy, which became an internationally acknowledged framework for evaluating the performance of public Environmental Funds. The Good Practices apply to all public agencies managing environmental expenditure programmes, including Environmental Funds, and they provide a framework for streamlining environmental management into mainstream public finance. The Good Practices were developed through a series of international consultations with various stakeholders from the EECCA, Central and Eastern Europe (CEE), and OECD countries.
The Good Practices provide guidance on how to design and implement public environmental expenditure programmes in line with sound principles of public finance. They outline rules, procedures, and organisational frameworks that are acceptable for Ministries of Finance, international donors, and International Financial Institutions (IFIs). They also provide checklists for measuring the extent to which a public environmental financing institution aligns with the sound, internationally recognised standards for such institutions. The performance of programmes and institutions is measured along three dimensions: environmental effectiveness, fiscal prudence, and management efficiency.
The Task Force for the Implementation of the Environmental Action Programme for Central and eastern Europe (EAP Task Force) has used this methodology to review and evaluate the performance of a number of EECCA Environmental Funds. Experience shows that most EECCA Environmental Funds do not comply with the Good Practices for such institutions and could perform better. They do not provide significant financing for critical environmental investments, and their expenditure programmes are vague and not governed by transparent rules. Spending decisions are often politically driven, rather than based on a clear appraisal and selection criteria. However, a few spectacular success stories from CEE as well as more recent positive developments in some EECCA States show that managing public resources for environmental priorities in an effective and efficient way is possible should Governments choose to make the effort and work to implement good international practices for public financing institutions.
Different States will follow different paths in implementing the Good Practices, depending on their economic and institutional development and the maturity of their markets and public finance systems. Nevertheless, the Good Practices offer a general guidance for implementing reforms of existing public environmental expenditure programmes and their management structures. In addition, they can also be used when considering the possible establishment of new programmes and structures.
For more information, see http://www.oecd.org/env/eap or contact Ms. Nelly Petkova at Nelly.PETKOVA@oecd.org. Alternatively, access the OECD on-line database at http://oecd.hybrid.pl